There will be another decline from PS4 to Ps5 as the numbers back up.

PS2 software was close to 10% in Japan, PS3 went to around 7-8%, then the PS4 saw a decline to around 4%, when you compared to WW totals. The PS4 saw growth in all regions regarding software and hardware but Asia.

Sony saw this and they won’t try too much with the PS5, hardware might be close to what the PS4 sold but software will be lower. It seems that the growth they made in other regions are enough for them.

I don't know who can look at the actual sales of the PS5's software with a straight face and continue to say "everything is fine", 

If you think Japanese companies that were planning PS5 exclusives aren't frantically renegotiating or looking into either multiplat or cross-gen alternatives. 

For those that already revealed their games and are knee deep into development the ship has sailed. But knowing how slow Japanese companies are to transitions there is only a handful capable of launching AAA games at the moment without major risks to their business - Square(FFXVI & Forspoken), Bandai(likely next Tekken), Capcom(Pragmata & likely next Street Fighter), Kadokawa/FromSoftware(next Dark Souls). Beyond these companies the rest of Japan isn't going to be trying to compete with Western companies both in terms of pixel counts or marketing budgets. 

Third parties that have Switch games saw an average of 80% YoY growth just among the Top 50 third party games on the Switch compared to the Top 50 an year ago. This same process is playing out in other countries namely South Korea & Taiwan for which we get numbers via the White Paper. Every week we also get South Korean and Taiwan Top 5 rankings, and honestly AA efforts from Japanese companies are doing great on the Switch. Especially in South Korea, PS4/PS5 is a no factor, while in Taiwan Switch is likely heading towards 75% or more of the software sales in the country. Why do I bring this up, well because Taiwan and Chinese gaming tastes are likely as similar you'd get across two different countries - so it gives us an idea about what type of market dynamics are likely taking place in China as well, which remains the biggest gaming market despite the best efforts of the Chinese government, consoles are still under 5% market share so plenty of space to grow. 

Media Create Sales (South Korea): CY 2020 (2019 Dec 30 - 2021 Jan 03)

01./00. [NSW] Animal Crossing: New Horizons (Nintendo) {2020.03.20}
02./00. [NSW] Ring Fit Adventure (Nintendo) {2019.10.18}
03./00. [NSW] Pokemon Sword / Shield (Pokemon Co.) {2019.11.15}
04./00. [NSW] Mario Kart 8 Deluxe (Nintendo) {2017.12.15}
05./00. [NSW] The Legend of Zelda: Breath of the Wild (Nintendo) {2018.02.01}
06./00. [NSW] Super Mario Party (Nintendo) {2018.10.05}
07./00. [NSW] Minecraft (Nintendo) {2020.01.16}
08./00. [NSW] Hyrule Warriors: Age of Calamity (Koei Tecmo) {2020.11.20}
09./00. [NSW] Super Mario Odyssey (Nintendo) {2017.12.01}
10./00. [NSW] Super Smash Bros. Ultimate # (Nintendo) {2018.12.07}

SOFTWARE
01. NSW - 2.738.421 <81,13%>
02. PS4 - 576.879 <17,09%>
03. 3DS - 41.945 <1,24%>
04. PS5 - 18.270 <0,54%>
00. ALL - 3.375.515 <100,00%>

Media Create Sales (Taiwan): CY 2020 (2019 Dec 30 - 2021 Jan 03)

01./00. [NSW] Ring Fit Adventure (Nintendo) {2019.10.31}
02./00. [NSW] Animal Crossing: New Horizons (Nintendo) {2020.03.20}
03./00. [NSW] Super Mario Party (Nintendo) {2018.10.05}
04./00. [NSW] Mario Kart 8 Deluxe (Nintendo) {2017.12.15}
05./00. [PS4] The Last of Us Part II (Sony Interactive Entertainment) {2020.06.19}
06./00. [PS4] Final Fantasy VII Remake (Square Enix) {2020.04.10}
07./00. [PS4] Ghost of Tsushima (Sony Interactive Entertainment) {2020.07.17}
08./00. [NSW] One Piece: Pirate Warriors 4 (Bandai Namco Entertainment) {2020.03.26}
09./00. [NSW] Pokemon Sword / Shield (Pokemon Co.) {2019.11.15}
10./00. [NSW] New Super Mario Bros. U Deluxe (Nintendo) {2019.01.11}

SOFTWARE
01. NSW - 1.304.139 <59,82%>
02. PS4 - 863.897 <39,63%>
03. PS5 - 10.692 <0,49%>
04. XBS - 1.262 <0,06%>
00. ALL - 2.179.990 <100,00%>

I think one big issue is comparing peak Switch SW sales (year 5) with the opposite of peak PS5 SW sales (year 1).

Sure you can compare to the Wii U as well, which peaked early and died quickly.

But the issue is that the PS5 doesn't have any major Japanese exclusives yet. Most are shared with the PS4, and it looks like it will continue for a year or 2. Sony apparently believes it is worth it, we shall see in the coming years.

I think being so alarmist about the PS5 so early in its life is just premature. This premature alarmism is just exacerbated with the massive supply issues worldwide. Hopefully the picture becomes more clear with proper supply and some solid Japanese exclusives.

It does look quite alarming compared to PS4 2014. It didn't only sell way more software, it's attachrate was also way higher.

If the cross gen support for PS4/PS5 is going to last as long as the cross gen support for PS3/PS4 then we truly won't see much japanese exclusives for PS5 until early 2023 at the earliest. Even then most if not all major japanese games now include PC and Xbox, so you have other options to choose from.

Even then everyone is expecting the PS5 to sell less than the PS4 since the PS4 sold less than the PS3 (and Japan is the only region where the PS4 did worse than PS3 in both hardware and software).

Should Nintendo make a switch lite OLED? If they do should they keep 4 different models on the market or phase out the two non-oled models? 

Does anyone except a price drop at all for any of the switch models in 2022?

Nintendo needs to focus on producing as many units of their existing models as possible.

While true, everyone expected the PS5 to decline compared to the PS4. It shouldn't be this bad, but I think that is a consequence to the supply issues. If many of the consoles in Japan are being bought by Chinese bots, then how are the true Japanese consumers supposed to buy any software?

And if that strategy seems to work for Sony, then we will have to wait to see.

Yes decline is definitely expected. Even comparing Switch vs the previous consoles, there is only a modest boost compared to the worldwide massive boost.

Not that I come close to agreeing with SRC but we have no clue whats going to happen when sony increases the shipments for Japan + more game releases. So far it looks to be a demand otherwise it would not be sold out. Also don't really think Japanese game companies are worried most of them have their biggest financial succes with Sony and the West is their biggest market. I think making a game exclusive for Switch is still seen as a bigger risk.

Big risk? Based on what? Do you have any data? or make belief?

Monster Hunter Rise, Momotaro says otherwise. 

Dragon Quest XI a late port has, with good prediction, surpassed 1M.

Where is the big risk?

PS5 has a dreadful SOFTWARE sales, dreadful, Falcom, one of the most Sony fanboys company, now will produce internally for Switch.