This article is from a SONY executive talking about how Japanese Game Developers have fallen WAY behind their Western counterparts.

Several reasons are listed for their failure. 

First and foremost is that the technology base has shifted from Japan to the US and Europe.  Full article below.

http://news.softpedia.com/news/Sony-Thinks-That-Japanese-Game-Developers-Aren-039-t-Doing-So-Well-94168.shtml

Japanese developers aren't what they used to be, at least that's what Sony Computer Entertainment executive Shuhei Yoshida thinks. In a recent interview with VideoGaming 247 he had the following to say regarding the current state of Japanese game development.

"What’s happened since the days of PS2; technology becomes more sophisticated, and more and more intense graphics technology. The technology base has shifted from Japan to the US and Europe. There are also talented people, engineers in the US and Europe, and it’s relatively easy to form a large team that required to create this generation of games. That’s not the case in Japan. Because they don’t have a large base, like the movie industry; there aren’t a lot of people in the high end of computer graphics. That’s making the many great developers in Japan make slow progress."


Although this isn't the best of times for game developers in Japan, many of them currently having RPG and casual titles under development, which are not the favorite of the European and American public, most of them still make a decent profit on the local market. The reason for this shift from high end graphics and intense gameplay titles to these types of games is the fact that they require only basic gameplay features and graphics which don't really push the edge in terms of visual effects.

Mr. Yoshida also points out that several of the games that were developed in Japan, like Metal Gear Solid 4: Guns of the Patriots or Gran Turismo 5, which had really successful teams working on them, are rare examples of quality high-end titles, but they are just an exception, because all the rest don't even come close to them.

All we can really hope now is that Japanese developers get back on their feet because we've seen some really stunning games coming from them in the past. It would be really bad if they focused only on titles designed for their local market, instead of creating games for the whole world.

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I totally agree.  Japan is not what it used to be with regard to game innovation and development.  Below is a link to another article detailing the struggling Japanese game developing community.

http://kokugamer.com/2009/11/28/can-gaming-survive-without-japanese-game-developers/

i still prefer japanese games.
they are more fun , have better storyline and music.
even if not many can pay for HD graphics.

the problem is that many of the japanese games are made for Japan only or niche games. When the dev costs get as high as they are now these games can't be made anymore. It used to be that games could be profitable selling a small amount but it just doesn't work anymore. That's a big part of the reason for the switch to handhelds.

I still prefer Japanese based games. But honestly I really do think if Japanese devs didn't shun the Wii and PS3 from the get-go they would be in a better place right now.

Not Konami! Just wait until next year because their biggest franchise, MGS, is rising!!!

Final Fantasy Versus XIII =).

we are getting plenty of RPG's next year which is great b/c the consoles need this. However it still dosent hold a candle stick to the DS RPG library. Hopefully FFXIII helps stabilize things and be as a calling sign for other RPG developers to make games for the consoles

I hate it when Handhelds get RPGs just because I can never find the time to play handhelds! I got Persona PSP and I never really play it because I just overlook my PSP and DS (FFIV in that case)

why though??? i no its bit frustrating at times to play an RPG on a handheld instead of a console. But the fact is they have them and the consoles dont. plus i made the mistake of underestimating the DS capabilities and i had to suffer the RPG drought b/c of it, which was very painful