The money they invested in the Japanese market earlier this generation would've probably been much more effective had it been used to establish a better footing in mainland Europe. They spent a decent chunk of change pursuing Japanese exclusives and improving Xbox Live in the region, and I think investing that money solely in making Xbox Live more enticing to mainland European areas (or available at all, looking at parts of Eastern Europe) would've helped them considerably more longterm.

I think now they'll have a hard time battling Steam and PSN given how they've entrenched themselves in that market.

Poor MicroSoft, without those 2,000 unit sales they are doomed.

I'll never understand why the Japanese dislike western consoles and games so much

They only like to play with themselves/own stuff?

"Doomed" is such a strong word given the weak numbers everyone pull in Japan. Even PS3 has been drop YOY over there. Not a drop as huge, but still. Japan is a portable market, that why Sony has the PSP remastered tittles coming to the PS3. MS unfortunately, can't take the same advantage.

Well, my only concern is the next gen now. I love Japanese games (my Xbox library is mostly made of Japanese games, some imports even). If MS just ditch the Japan altogether for the next gen, that would give me no choice but buy the PS4 or WiiU as they would get most support. As i play mostly on Xbox and i intend to buy the Nextbox already, i can tell that would really suck to me.

Japan likes wierd games so great 360 exclusives don't fly there. Also they support the two systems that are Japan based. Not a big shock there either.

There. Now it's fixed.

Well, it had a good run.

I think the last years were rather financial healthy for MS.  Low hardware sales but the software ratio was alright.

No its not.  Even western titles that are huge on PS3 everywhere else on Earth usually far lower in Japan.  In general there is certainly a negative bias in Japan towards western software and hardware.