If form factor is included then yeah that's clearly the biggest thing holding Playstation consoles back there but after that price has obviously been the biggest reason for its awful sales there since September 2024. It collapsing in sales immediately after a significant price increase makes that abundantly clear. If that didn't happen its sales this year would've been a lot higher.

Top 30: https://nintendoeverything.com/famitsu-software-sales-12-1-25-12-7-25-top-30/

1. [NS2] Mario Kart World – 102,435 / 2,354,146
2. [NS2] Kirby Air Riders – 46,737 / 288,618
3. [NS2] Pokemon Legends: Z-A – Nintendo Switch 2 Edition – 44,331 / 862,377
4. [NSW] Pokemon Legends: Z-A – 40,441 / 1,347,242
5. [NSW] Octopath Traveler 0 – 21,698 / NEW
6. [NS2] Metroid Prime 4: Beyond – Nintendo Switch 2 Edition – 21,415 / NEW
7. [NS2] Momotaro Dentetsu 2 – Nintendo Switch 2 Edition – 19,806 / 113,094
8. [PS5] Octopath Traveler 0 – 19,533 / NEW
9. [NS2] Octopath Traveler 0 – 18,083 / NEW
10. [NSW] Momotaro Dentetsu 2 – 17,851 / 158,992
11. [NSW] Minecraft – 9,017 / 4,066,399
12. [NS2] Hyrule Warriors: Age of Imprisonment – 8,692 / 118,460
13. [NSW] Animal Crossing: New Horizons – 8,558 / 8,274,414
14. [NS2] Donkey Kong Bananza – 7,819 / 391,264
15. [NSW] Metroid Prime 4: Beyond – 7,586 / NEW
16. [NS2] Dragon Quest 1 & 2 HD-2D Remake – 6,273 / 119,388
17. [NSW] Dragon Quest 1 & 2 HD-2D Remake – 6,248 / 300,099
18. [NS2] Super Mario Party Jamboree – Nintendo Switch 2 Edition + Jamboree TV – 5,830 / 90,469
19. [NSW] Super Mario Galaxy + Super Mario Galaxy 2 – 5,404 / 112,306
20. [NSW] Super Smash Bros. Ultimate – 5,118 / 5,825,550
21. [NSW] Super Mario Party Jamboree – 4,934 / 1,423,074
22. [NSW] Mario Kart 8 Deluxe – 4,765 / 6,481,405
23. [PS5] Ghost of Yotei – 3,395 / 190,120
24. [NSW] Pokemon Scarlet / Violet – 2,691 / 5,639,676
25. [NSW] Demon Slayer: Kimetsu no Yaiba – The Hinokami Chronicles 2 – 2,680 / 154,567
26. [NSW] Dragon Ball: Sparking Zero – 2,668 / 20,932
27. [NSW] Nintendo Switch Sports – 2,622 / 1,665,263
28. [NS2] Tamagotchi Plaza – Nintendo Switch 2 Edition – 2,566 / 73,188
29. [NSW] Football Manager 26 Touch – 2,512 / NEW
30. [NSW] Tamagotchi Plaza – 2,339 / 202,518

NS - 17
NS2 - 11
PS5 - 2

I stand corrected in this assertion. Cumulative software is indeed much more representative than single title sales

This chart really shows why Playstation Japan are scared of the Switch 2. The PS4 and PS5 had the benefit of getting big Japanese games that couldn't run on the Switch, so Japanese gamers had to get those consoles. Now Capcom and Square Enix the two biggest publishers outside of Nintendo and Pokemon Co. are all in on Switch 2. DQ 1&2 HD outsold the PS5 version and Octopath 0 will sell more on Switch 2 overtime (most likely next week). Pragmata and RE9 are most likely going to be even. The Switch 2 is pulling potential PS5 console and software buyers.

The decline of third-party game sales is because they choose to primarily, or even exclusively, develop more Western-focused IPs, or take their IPs in a more Western direction, for international PlayStation (and PC) audiences on top of withholding or not releasing them on Switch. Because Japanese developers have been trying to follow the Western mentality of "More, More, MORE graphics" with diminishing returns. Which may work in the Western markets, but the Japanese market don't care about specs and graphics nearly as much as the Western ones do.

Pre-Switch 2, this made sense when it came to making a game primarily for PS5 and PC - Because those games would have a tough time running on PS4, so Switch 1 was out of the question despite that system being the market leader because there was no way it was going to work without MAJOR drawbacks.

And even with Switch 2 out, that can still be the case for a game that REALLY pushes and takes advantage of the PS5 and, eventually, the PS6's power. 

That reason goes right out the window if a PlayStation handheld is made and if they want it to play PS5 and PS6 games.

Because in order for those PS5 and even PS6 games to run well and be playable on a PS handheld, they'd have to scale them back to the point where it can also run on Switch 2 with little effort. If that happens, then there really is NO reason at that point to NOT put their games on Switch 2 unless Sony money-hats the hell out of those games.

So, if all those third-party games are coming out on Switch 2 as well - Then what reason is there for Japanese players to get a PlayStation anymore?

Because they're not buying it for God of War, Last of Us, Death Stranding, Spider-Man/Wolverine, or Horizon (Sony 1st party IPs). They're buying it for Monster Hunter, Dragon Quest, Persona, Final Fantasy, and Yakuza (3rd party IPs - Ones that are starting to appear more frequently on Nintendo.)

So we're right back to square one - The crux of the problem. Sony's lack of their own games to entice Japanese players.

Software is definitely the #1 issue for Sony in Japan (and its Nintendos #1 issue in Europe). If Sony goes with a hybrid device it's also a very tricky situation for the following reasons.

1. Bulky handhelds are not attractive to the mass consumer, most people want light, sleek and small. This limits options when it comes to power.
2. Battery life, if a handheld is too powerful its gonna drain the battery life super fast.

Maybe im wrong, but I cant recall a really powerful portable that was bulky and a shorter battery life that sold really well? Sony of course knows this so trying to go for a smaller, less powerful, longer battery life portable would be a wise goal. But if they do this, its going to be a lot closer in specs to the NS2 which for 3rd parties will be fantastic as they can put their games on both platforms. But then this doesnt help Sony's situation at all (from a 3rd party standpoint)

This is the first time, that I know of, where Nintendo is now getting day 1 releases of big third party games. I also keep hearing rumors that one of the reasons GTA6 was delayed was for a NS2 port. 

Well, not the first time, but Switch 2 is definitely shaping up to have the strongest third party support of any Nintendo platform since at least the Gamecube, with the likes of current gen Resident Evil and Assassin's Creed, Pragmata, FF7R, 007 First Light, the sort of games that would have skipped Nintendo back on the Wii, Wii U, or even the Switch 1.