Japan seems to favour more visually stylized ("cartoony") games that emphasize gameplay over spectacle or realism.

No, but 3DS did. Outsold PS4 and Vita, together, by far.

Also..., don't think PS4 sold "that good" in Japan: It was the worst domestic Playstation there. Until now.

Playstation have a dozen of those type of games, more often than not they sell poorly. In fact the best selling Playstation games in Japan in PS4 and PS5 are mostly high profile with high level of graphical fidelity. The only exceptions I can think that sold over half million units with cartoonish graphics must be JRPGs Dragon Quest and Persona 5, which I don't even think are cartoonish, more like anime-ish if that makes sense

I believe the problem with your reasoning is people who like cartoonish graphics are all buying Nintendo, so they can play portable 

People buy Playstation for western games and high end games with good graphics. This is true in West and is also true in Japan. The key point is the audience for AAA games is small in Japan, maybe enough to move 6-8 million units. While in west the audience for this kind of game is just bigger

Also, liking cartoonish gameplay focused and game with high fidelity with focus in story are not mutually exclusive, you can enjoy both, likewise owning two consoles thet offer both 

Case point, I choose to buy Octopath Travaler 2 on my Switch, simply because the game does not demand high end hardware, so with my Swtich I can play anywhere. In other hand I choose to get Hogwarts Legacy on PS5, because the graphical fidelity is better as well as performance 

You're focusing too much on just the graphics; it's more about where the emphasis lies, whether on gameplay and stylization or spectacle and being cinematic. There are simply not many PS exclusives that cater to Japanese tastes, and most of the multiplats that do are on Switch as well.

Being gameplay focused and targeting high specs are not in any shape of form conflicting concepts. Sure Sony first party are story focused, but I can list a hundred of third party games from XBOX and Playstation that don't move a needle in Japan. I could buy the exclusivity argument, but they aren't selling on Xbox or PC either. They simply aren't popular

Ironically, JRPGs which are fairly story focused do well regardless of the platform. Maybe Japanese people have no problem with story focused games after all? 

I never said graphics and gameplay were mutually exclusive, or that the Japanese just don't like story focused games. 

Just that if you compare Sony's exclusives, which sell well in the West but poorly in Japan, to Nintendo's, which sell well in both Japan and the West, those are the key differences.

Sony first party games always had middling popularity in Japan even in PS1 and PS2 days. Third parties were the ones that made Playstation popular. Sony kept exclusivity of those games during PS3 and PS4 days and nothing helped their consoles to fare much better, granted Sony is in their all time low in the market the writings were on the wall since PSP managed to sell twice the numbers of PS3 

IMO software is not the main issue here, hardware is. First price, second format. Not even Nintendo with the hottest IPs in the market could sell home consoles in Japan

Being handheld is a huge deal in Japan, only way for Sony to recover is releasing portable systems again

PS Vita sold 60% of PS4 units in Japan. Everywhere else the sales ratio between both were closer to 6%,  I have no doubt a portable PS5 would quickly outsell a home PS5 and at least inject some life for Sony in Japan which, right now, is barely surviving 

Are people forgetting PS5 is a home console? It's selling what a traditional home console been selling in Japan the last 20 years or so. N64, GC, Wii, Wii U all weren't as nearly as successful as the Switch because they were all traditional home console. Even with the price hikes, PS5 is gonna sell similar to PS3 and PS4 around 10m which is fine in Japan

It is highly unlikely the PS5 makes it to 9m in Japan.  No way it makes it to 10m.

The PS5 sold under 1.5m in Japan last year and will almost certainly sell less than 1m this year.  What do you realistically expect the console to sell in 2026?  How about 2027? 

The GTA6 effect is not going to help the PS5 in Japan.  It is well past its peak and Switch 2 is coming out in the next few months.

It's definitely gonna surpass PS4 and reach 9.5m I'm willing to bet on that. It just needs to sell 3m in the next 3 years to reach 10m which is very likely . Monster hunter will give it a huge boost this year