I've been watching Japanese sales attentively for a few months now, and have sometimes asked y-koron some questions about the Japanese market. That has led me to conclude the following:

In my opinion, PS3's hardest fight in the console war is its hometown, Japan. There are several factors which make me say this, the most important of which are:

• the fact that handhelds (the DS, actually) are dominating Japan's videogame sales in a big way. I don't know the exact reasons for this, but it wouldn't surprise me if it's mostly due to the fact that the Japanese society is workaholic in general, which doesn't leave them much time to play games at home. A nice handheld is consequently a great choice to enjoy gaming in their spare time (especially while commuting).
• low hardware sales, which of course is affected by the above reason. This week of sales is especially alarming. Judging by Famitsu's numbers, the PS3 has lost almost all of the momentum it gained from its pre-holiday 4-hit combo (price cut, new model, new colors, Dualshock 3). The holiday drop isn't over yet, so we're likely to see the PS3 stand at a new plateau which is going to be only slightly higher than what it was in 2007.
• the fact that PS3's software attach ratio is very low in Japan, even though the userbase is small (which is typically when the attach ratio should be big, due to early-adopters and hardcore gamers). Software sales are very low, even though the PS3 has gotten some interesting releases which are perfectly tailored to the Japanese market. This leads me to believe that a lot of Japanese people are using their PS3s as Blu-Ray player. The HDTV market is bigger in Japan, and y-koron said that the PS3 is probably the cheapest Blu-Ray player there, especially since the 40 GB model was launched.

It's sometimes easy to think that the PS3's hardest fight is in USA, but I think it's actually doing fine in USA, considering its lower userbase vs the 360. The above factors are true in Japan and Japan only. Both in USA and Europe, significant momentum was gained from the price cuts, and software releases keep contributing to PS3's momentum, while in Japan we have been observing indifference towards PS3's gaming capabilities.

Most importantly, Sony must find a way to avoid the PS3 from going PSP's way in Japan - it's well known that the PSP sells a lot of hardware but little software, also due to multimedia capabilities. Otherwise, the PS3 is likely to continue being a niche product which doesn't really contribute to the gaming division in the form of royalties or garnering 3rd party developer support.

I can only say, that if
Dead or Alive 4,
Dead Rising,
Lost Planet,
Eternal Sonata,
Blue Dragon,
Lost Odyssey,
Ace Combat 6.

were released on PS3, instead of x360, we already today would see over 100k PS3 sales weekly.
M$ did good job, on BUYING all this games for x360, instead letting them to be released on PS3. This of`course hurts PS3 sales in Japan, BUT this won`t LAST forever.

PS3 will get it`s:
WKS,
Eternal Sonata,
Lost Planet,
Devil May Cry 4,
Ace combat 6(eventually),
Disgaea 3,
MGS4,
GT5,
FFXIII.

All what PS3 today have are:
HG5,
NGS,
Folklore(more action then jrpg)
VF5(even wihout online),
GT5P,
+ some MP games like dynasty warriors and etc.

All good points, but I think there's one you forgot. While the US has historically given ample support to more than one platform each generation (last gen console shipments: 47M, 16M, 12M), Japan has chosen one home console and ignored the rest (last gen console shipments: 24M, 4M, 500k). I think we can all see that they've made their choice already, and it wasn't Sony.

The PS3 is just barely doing better than the Gamecube in Japan, and it'll almost certainly fail to reach 6 million units during its lifetime. I'd be skeptical of even 5M, but there are still a few big exclusives left, which will probably do better than anything on the Gamecube did.

I disagree, I think the hardest fight will be in the USA, but don't get me wrong, Japan is a very close second, no Japanese style games is really hurting it right now. And I don't think LBP will do good there, it's a western developed game.

What the hell is SCEI doing? The only big games we've seen from them is HSG5 (Clap Hanz), Eye of Judgment and GT5P (PD), where's Ape Escape? Siren? Team ICO? Wild Arms? Develop a new RPG to get some interest on the PS3, anything.

no PS3 games appeal to the japaneese at the moment...

 This is a very good point and I agree to a certain extent. The problem wih the GC was that there was no big non-Nintendo games that the japanese like on the system besides RE4. PS3 will have RE5, MGS4, GT5, FFXIII, FFvXIII which all sell well in Japan. I don't see the PS3 passing the Wii in Japan (or anywhere else for that matter), but I definitely see a break in tradition where 2 consoles do fairly well in Japan. 

its taken 1 year and a bit for ps3 to reach 1.79 million in japan. with your logic, the ps3 will only last 3-4 years in japan. im pretty sure ps3 will have a longer lifespan than that.

 also, you havent taken into consideration, that sales can increase. you cant just say assumie that sales will remain the same. price drops will occur, and there will be hardware driving software.

it will do better than the gamecube in Japan purely because it is the 'sequel' to the PS2.

@Parokki,
6 mln.? are you INSANE? =))

OR, You just think, that people who will buy in Japan:
Metal Gear Solid 4,
Killzone 2 + Resistance 2,
LittleBigPlanet,
Gran Turismo 5,
Tekken 6,
Final Fantasy XIII + Final Fantasy XIII:versus,
White Knight Story,
Devil May Cry 4,
Last Remnant,
Star Ocean 4,
Soul Calibur 4,
Armored Core 4,
Naruto PS3 project,
Disgaea 3,
Team ICO games,
Tales of Vesperia,
Resident Evil 5,
Silent Hill 5,
Grand Theft Auto 4,
Jakuza 3,
Hot Shots Golf 5.

Are SAME 6 mln.? =))
AND these games WON`T come to Wii.