It's going to be interesting having this conversation in another 10 years or so when we have to start including China and Korea in the discussion. Especially since most of the AAA studios are already outsourcing a lot of the labor to Asia.
Japan is not out of the picture, but judging from this thread there are a fair number of people who are crapping on the industry here for the wrong reasons.
Around E3, the newspapers ran a story about gaming in the United States and it came up that the average age of your typical video game player was around 37 years old. The average age of the person actually buying the game was around 41 years old. This figure has been steadily increasing as gamers (and western developers) continue to grow older. On the flip side, the average age of your typical gamer in Japan is somewhere in the late teens as far as I know.
Having lived and worked in both the US and Japan, I will tell you that your average working class American has way more free time to play games than your average working class Japanese. Not only that, but the 1UP article hit the nail on the head, the perception about gaming is completely different. You tell someone that your hobby is gaming (among other things) and they're more likely to either A) be a lot more accepting about it than your average Japanese salaryman / housewife (who will be pressured into thinking that it's a waste of time, B) have a significantly higher chance of running into someone who is also a gamer C) receive an indifferent shrug.
Looking at
Wikipedia you'll see that as of June 2011, only 1.5m 360 consoles have sold compared to 25.4m in the US, 3.9m in the UK, and 13.7m in EMEA. In fact, Microsoft is talking about abandoning the platform (again) in Japan because they simply can't compete against Sony / Nintendo.
The PS3 has similarly skewed numbers, 6m units in Japan versus 32m units (America - 13.5m, EU + UK 19m). Considering that Japan has about half the population of the US, you'll see that simply not as many "adults" are sitting at home playing games in their (very little) free time.
Ok, so then who is playing games in Japan? Like 1UP said you got your middle school kids (mostly boys - MH, Pokemon, Gundam fans); high school kids (same games for the most part with some sport titles like Winning Eleven Soccer and Baseball,) your (shrinking) college crowd, and the freeters (who are basically unemployed adults who rely on part-time work or their parents to support them.) There is a small, dedicated population of "hardcore" gamers out there, but I very rarely meet any who are outside of the game industry. Most "gamers" are, as the article states, people who play their PSP or DS on the train or more frequently, commuters who are now turning to their iphones / android phones for cheap, mindless time-killing.
Nintendo still makes money of their IP. They still manage to sell "family-oriented" games, but they're currently in trouble - big trouble.
Anyway, the point is that some of you are going on about how great western games are compared to Japan, and yes, western games have gotten a lot better than they were. You're completely neglecting the fact that Japanese game companies are not looking for your western dollars (especially with the weak ass dollar messing up my exchange rates), they're trying to stay alive and that means making games that target the ↑ aforementioned ↑ market.
SOME developers here don't want to resort to that. Some developers want to make games that people around the world can play and enjoy. Most of those developers have deep pockets and don't have to worry about a single failure sinking their company. With people's jobs on the line, do you really blame them for taking a safer approach? The company I work at is a small start-up that is trying to stay away from derivative moe / anime games and make something new that we think people all over the world can enjoy. It's a hard sell right now and the industry has changed a lot in the past 10 years.
I found the article to be pretty accurate.
Why Lost Odyssey? What was it about the game that sets it apart from everything else? The actual game system is pretty antiquated, slow, turn-based, command entry combat. It still relies on random encounters. Plus, the swords & sorcery with a touch of SF based setting wasn't anything particularly new. The game's strongest areas - Inoue's character designs, Uematsu's soundtrack, and writing by Shigematsu / Rubin were nice points but they're not really indicative of any sort of advanced game design. (To be fair, I did like the game.)