About 10 years ago the total Japaneese gaming market hit a high point and then started to go into a period of decline; initially people blamed the decline of arcade gaming and handhelds on the fact that the "new" consoles (Gamecube and PS2) offered arcade quality gaming in the home, and cellphones were eating into the handheld gaming market. Because the market remained smaller through most of the PS2/Gamecube generation, and cellphone gaming never really took off one can assume that the initial assumptions about this downturn were wrong ...
In my opinion, the Japaneese gaming recession was really caused because the Japaneese gaming market favours inovation and new/unique gaming experience above and beyond all else; this is part of the reason why arcades survived far longer in Japan than they did elsewhere in the world. When the DS and Wii arrived and were able to provide the new experiences that the Gameboy Advance and PS2 were not able to the Japaneese population rapidly adopted these products and the market began to grow again.
The PS3 struggles in Japan because it provides (basically) the same gaming experience that the PS2 and Playstation provided ...
