Post-PS2 there's been a radical drop even among games that used to traditionally be appealing or similar in Japan. Wii was the only real outlier and that was pushing a different type of gaming experience for the most part that died off harder than everywhere else because Move and Kinect was able to ride that wave for a bit, where as in Japan both didn't do much at all relative to other countries.
Software situation was always drastic, it's just much worse now because Nintendo has left the market to push unified teams for their handheld and they already dominated third-parties since post-PS2 in Japan specifically for their handhelds even with early 3DS when it wasn't looking rosy. AAA is basically the only thing Sony had and they made a lot of decisions that shot themselves in the foot there that made it so several games are now leaving Sony's bubble to go to Xbox, or as we have seen a big increase in PC storefronts, or retreating to mobile.
EA sports games were somewhat popular in Japan, and then software collapsed in general, in fact EA proves my point it's not so much about appeal outside a slight margin but rather console has failed to appeal to the japanese gamer. Many PS5 sales aren't even being sold to Japan.
Several of the games that lead sales for western consoles are popular in Japan with what consoles or there to an extent, or on other platforms like the PC or mobile versions. Games like Assassins creed aren't really systems movers the way people think not just in Japan but the west so not the best example. Take 2 sports games were also somewhat popular and fell for the same reasons.
Third-party game companies domestically there in general are moving more to PC and mobile, before that post-PS2 it was PC and Handheld and that's what's been the cause of the software drought. Sure there are some better decisions that could have been made for appeal that may have helped but it wouldn't have resolved the problem.
Even on the dominant switch where much of the TP currently is that hasn't shifted to PC or mobile, I don't think there are even 6 standalone third-party developed/published games that have sold over 1 million on the Switch, In fact I would even say I'm not even sure there's 4 of them in japan.
I think we're saying the same thing. That Japanese third parties have fundamentally been unable to appeal to their home market in recent times.
A lot of the third party franchises that were popular on the PS1/PS2 have declined since then (Final Fantasy, Resident Evil, Warriors, etc.), but unlike the West there hasn't been many consistently successfully new/growing IP to replace them. Call of Duty, Assassin's Creed, and Take 2 Sports games are definitely system movers but we don't have as many third party examples from Japan.
Monster Hunter has been the main breakout franchise with staying power in that country, and we got Elden Ring this year which looks to have a promising and future as well. At one point it looked like Level 5 would be the third party to gain a lot of power in Japan (with Layton, Yokai Watch, Inazuma 11 etc) but then they imploded in spectacular fashion.
The current state of the Japanese industry can mostly be explained by Nintendo being the only publisher to be consistently creating popular new franchises. Some of them were popular from being on handhelds but others (Wii Sports, Splatoon and Ring Fit Adventure) were not. At the same time, they have also been able to grow existing franchises ( Zelda, Animal Crossing, Pokémon) in a way that other publishers haven't.
This has led to the situation today where Nintendo controls 70%+ of the software market.
Things are looking up for PS5 next year in terms of releases, and with a new Switch coming in the not too distant future, we will hopefully see more third parties creating new hits and growing their sales on the PlayStation/Switch ecosystem