I think comparing Japan to the West, Japan will never "win" again. Development budgets have gotten too large for a single country to ever compete against the entire rest of the world again.
When looking at on an individual country basis Japan still completely destroys all other countries though. I can't think of a single other country that even comes remotely close to matching Japan's output.
In terms of AAA Japan produces probably about as much or maybe a little more than other individual countries. Recent examples include, The Last Guardian, Resident Evil 7, Zelda BOTW, FFXV. Compared to the U.S. for example the last notable U.S. AAA release is probably last year's COD or Titanfall 2. (Horizon is Dutch, Mass Effect is Canada, Dishonored 2 is French, Halo Wars 2 is British, Dead Rising 4 is Canada, etc.). It was actually quite surprising to me how little game development is actually done in the U.S.
It's in terms of A or AA games that Japanese games completely destroy the competition. Is there any Western equivalent to recent games like Persona 5, Nioh, Nier Automata, Gravity Rush 2, Yakuza 0, etc.? I guess something like Torment Tides of Numera..? Even then that's leaning more indie to me.
In terms of indie games Japan definitely falls flat. Maybe it's because I don't really follow the indie games scene much, but I've only really heard of Downwell as a Japanese indie game. The indie game scene in Japan could definitely use a lot of improvement imo, but with an increase in indie game festivals maybe things will get better.
With this in I can see how, if someone only played AAA and indie games, and lumped every game not made in Japan into the "Western game" category I can see how people could downplay Japan's position in the industry. The fact remains though, that even today no single country even come close to going toe to toe with Japan in terms of game development.
