From Media Create's 2020 CY Report:
This year Japanese Video Game market will reach it's highest point since 2010, as software is heading towards being up YoY due to third parties finding success on the Switch offsetting the huge year New Horizon had in 2020 and the big drop in PS ecosystem drop YoY.
Next year it will likely reach 2007 levels due to Switch entering it's software peak(Arceus, Splatoon 3, Breath of the Wild Sequel).
It's only Sony that's becoming irrelevant in Japan, this year software on the PlayStation Ecosystem is currently down more than 50% YoY.
The PS4 is basically being killed of far quicker than any prior console to ensure a fast transition elsewhere but in Japan this spells only further decline for the PS Ecosystem.
Compare what the PS4 managed last year to this year and the rapid decline is there for all to see - it's top selling game Resident Evil: Village struggled to sell its initial shipment, while the only game that didn't under perform is probably Nier Replicant.
With the PS5 having a tie ratio of 0.4 it's heading for X360 like performance in Japan its not viable for a large portion of third parties to release anything exlusive on the system unless they are supported by Sony.
Back in the PS2, PSP days Japan Studio published
100+ different third party games on those systems; both small and big titles. They scaled support back on the PS3 and PSV.
When they started the transition to the PS4 they stopped the support smaller devs all together and were mostly publishing and marketing Western Titles like Call of Duty, Destiny, etc.. the only really major titles they published that were by Japanese game makers were Bloodborne & Death Stranding - they provided marketing support only for the AAA Japanese Third Party titles like Final Fantasy, Kingdom Hearts, Monster Hunter, Metal Gear Solid etc. The issue is that if you do't have a varied and constant stream of exclusive games for your system by Japanese game makers you lose relevance especially for a system like the PlayStation which was always reliant on third party Devs; the major success Sony had with the PS2 and PSP in Japan where because they were default system for a vast majority of third party titles - both big and small.
Last year was the first time there was parity between the PS Ecosystem and the Switch Ecosystem in terms of third party support, this year we are already seeing third parties drop PS support all together - ranging from Millennium Kitchen who used to be a PS focused developer now launching a game exclusively to the Switch, Konami launching Baseball Spirits exclusively to the Switch despite the franchise being exclusive to the PS in it's prior entries, Koei Tecmo reveling a new Musou exclusively for the Switch which doesn't use any Nintendo IPs - Touken Ranbu, while releasing PS focused franchises as multi-platform in the form of Samurai Warriors 5 and the latest entry in Dynasty Warriors.
By dissolving Japan Studios, Sony has also broken many interpersonal relationships the employees of Japan Studios had with third parties making them have an even smaller reason to focus on PS5 exclusives. And with the dire situation for PS5 software it's unlikely anything will change, as there is little incentive to actually even target the PS5 for 99% of AA games. This will have profound effects as for the first time ever the vast majority of Japanese Third Party devs will end up focusing on a Nintendo ecosystem, we are already seeing the impact of this - as Third Party Titles are likely to sell more on the Switch in 2021 compared to all previous years combined. A lot of them didn't expect Switch to be such a success but now are fully onboard, this will consolidate sales to one platform and will push software sales to new heights in Japan for a single system.
Japanese Third Parties were one of the competitive advantages Sony had over Microsoft; now it is becoming a competitive advantage for Nintendo. With competition to be featured on a Nintendo direct becoming more fierce - it means that there is inherent pressure to cozy up to Nintendo with timed exclusivity for game launches. We are already seeing the results for third parties that went this route and mobile remains far too competitive for most Japanese third parties, making Switch success far more accessible.