I think that when Microsoft decided to move into the console business they brought a lot of formerly PC-centric western developers along for the ride. Partly out of necessity, because they had no first party to speak of, and partly because it made sense to target western gamers with games aimed at western sensibilities.

The Japanese had simply owned consoles up until that point for rather obvious reasons, and so didn't really know how to react to this sudden and intense  competition on their home turf. For the most part they decided to turn inward, and with the Japanese market becoming increasingly focused on handhelds, they began focusing their efforts there.

Those who did try to compete with western developers decided to do by copying western games... poorly, and in a way that bespeaks a deep-seated insecurity. Whereas they used to just make the games they wanted to make, they were now trying to make games that they didn't necessarily like or even understand but which they thought/hoped a foreign market would like.

I think the biggest problem with your post is the assumption that everything in a super niche genre sells well. Most JRPGs and nearly every dating sim sells in very low numbers.

I think it is an issue, but it's a bit overblown. Western and Japanese companies have mismanaged this Gen. EA, THQ, etc have had their problems as well. While Nintendo, Activision, Bethesda, etc has been Successful. Initially,  a lot of Japanese devs couldn't use Unreal Engine or western developed engines, because they had difficulty understanding the UDK which were a lot of times in English. So that was a major thing that set them back. For whatever reason, they were inefficient at setting up their own engines.

The population of Japan is like 1/3rd of the US, and that's not even including all of Europe, or Canada. So if the other Regions improve or get close to their potential, the marketshare of Japanese things is inevitably going to become smaller.

Some Japanese companies have released, and navigated the western market somewhat successfully. They buy and establish studios in the west to appeal to the west. Sony has an array of western developers and IP's. SE despite expecting too much to offset their Japanese Mess, has made a profit and had critical success with western games like Deus Ex, Tomb Raider, Sleeping Dogs. Ofcourse they're going to have more issues away from their home region, the mindset is different. And Mobile games are more popular in Japan. So their console games are going to definetely be aimed at a western audience and there are and have been growing pains.  Before they could make a Japanese game on console and it didn't have to fare that well in the west as long as it did good in it's home region.  Now that isn't the case so much.

Western Devs, haven't been that successful in Japan, either, M$ has tried tried and tried, and games that are like CoD, and Ubisoft ones, have SE publish it for them.

PC developers entered the console gaming realm via Microsoft and the first Xbox and challenged the lagging quality of western gaming. Japan was destroying the west in console development, but didn't realize true top-tier western dominance until the PC devs jumped ship. Now even the western console devs are learning from the PC devs and are getting stronger because of it.

Exactly, the PC devs have always been ahead of the console devs. When MS brought them over to fill their ranks the first generation of the Xbox was just a taste of things to come. We've all seen how things turned out with the 360.

I can answer this question, Japan is an ascription based culture. It prevails that in work place everyone follows order from higher up. The board room, the project manager has one set goal, one vision and the whole company pursues it. Unfortunately, the older generation, those who are high up in corporate hierarchy are reluctant to change, against taking risks and prefers to pursue what has worked before.

Innovation is stunted in a way that the younger generation, who could potentially bring about a new perspective into the industry is unable climb up the ranks to be able to get their ideas into fruition. Basically, in Japan presenting a different idea to what has been laid out before you by your boss is akin to taboo in the work place. It is incredibly frown upon and you could lose your job without any explanation.

The management is also far out of touch with the public as well.

A cultural issue you say. Well I don't know Japan that well but what you just told me makes a lot of sense. When I watch trailers for new JRPGs, I try to like them but the turn based mechanics turn me away from them as it seems to similar to others.

So why in the hell don't Japanese corporations "learn" from Western corporations, as Walmart and Xerox did with Japanese, and start working with PC devs that are masters in RPG/Indy development? Business strategy failure?

Kresnik a lot of them went under but also a good amount of them released hits like Minecraft, Splosion man, Journey, State of Decay and got some fat contract due to their discernment.

Every single one of those games you listed was developed by a team that was founded during this generation - i.e. they moulded themselves in a way that they could find success in the current state of videogames.  All the Japanese devs I was talking about with small budgets & small returns have been around for many decades (Falcom & Compile - 80's; Gust & Nippon Ichi - 90's) and adapted to HD development without going under.

Besides, I'm not sure I understand your point.  Some devs found some successes; while hundreds of others went bust.  I'm sure you could find success stories in even the most dire of situations; but that doesn't make the situation any less bad.

The top Japanese develops in revenue are learning from Western devs outside of Nintendo. Kojima isnt competing with the Japanese, he's already won that war.