I think the japanese market this generation is a little tired of hardcore games, and they are an extremely trendy people. Anything that is popular seems to be picked up rabidly, like the Wii, and anything that is deemed unpopular is ignored and hidden away in shame. Also, things that are tiny and cute, and don't take up much space in cramped living quarters are preferred.
Add in their nationalistic fervor to ignoring foreign made products, MS's stigma of the last xbox (massive console + american size controller), and it's hard to imagine how they could see any success over there.
I think it's awesome how hard MS is fighting for that market given the high wall of entry. Maybe in 2009 they'll be able to release a '360 slim' and have a game library large enough to tempt even the most cautious japanese.
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