I can think of a few reasons, though this is not a comprehensive list. I have a friend who is a serious gamer and is now working tangentially in the industry through a division of Sega. The following is a blend of things he has said and my ideas on gaming here.
Japanese don’t pay all that much attention to things that are non-Japanese. Some people even think of the choice of console as an extension of nationality. I had a short conversation with a friend of my wife’s family who is interested in gaming. He has a PS2. He asked what console I had. When I answered, “Xbox,” he said, やっぱり、アメリカ人だから。(Of course, because you’re an American.) Compounding the foreign factor of the 360 console itself, there were very, very few Japanese-made games available for it during its first year of release. There still aren’t all that many around, especially in the RPG genre, which is what the vast majority of J-gamers are interested in.
It goes both ways; they don’t care what’s popular outside Japan to import, and most game makers don’t pay attention to outside market potential either. This is especially frustrating in the case of Nintendo. Super Mario Galaxy only sold about a quarter of a million copies while it is selling at over 3 times that rate in the US. The console is also selling better in the US than in Japan, where mobile gaming on the DS and to a more limited extent the PSP is the main market. At the Tokyo game show, there was a big section dedicated to mobile phone games, which are apparently a growing segment of the market.
Yet, Nintendo has publicly stated that they won’t open up a US or dedicated foreign games division to exploit this market. Instead, they’re still going to concentrate on Japan to the exclusion of the rest of the world. The US is practically throwing money at Nintendo, begging them to bring out more games for the region, and reduce the time from launch in Japan to publishing in the US, while Nintendo replies, “That’s nice, but we really don’t give a shit about you gaijin. We’re going to keep thinking of Japan as our primary, if not only market.”
The “Next Gen” thing isn’t much of a consideration for most Japanese. First, the gamers here are not into ultra-realism in games. The kind of games that tend to be preferred are those with a certain aesthetic, to the point where games that get terrible scores on gameplay in the West are considered decent games here just because of the ambiance. There’s not as much drive for great graphics because the aesthetic can be fulfilled almost as easily with cartoony, stylized figures and textures as they can with next generation consoles that are capable of ultra-detailed environments.
Also, Japanese are, by and large, not buying big-assed HDTVs. If you’re still using the older technology, all those impressive graphics get toned down to something not appreciably better than the latest releases of the old PS2 games where they knew all the tricks for getting the most out of the hardware. Part of the reason they’re not buying the HDTVs is that living spaces are more limited. My friend can barely get far enough away from his 42" Sharp to view it properly, and he’s willing to set up his whole living room to be dedicated to gaming and movie viewing.
IMO, Xbox Japan’s marketing division licks warthog scrotum. There are only a few display stations in most places in Akihabara (aka: Otaku Mecca), many of them are put in out of the way places in the stores, and few of them are set up and calibrated so that the picture and sound looks brilliant. If I were in charge of things, I would have a support team to set up and maintain displays, and would negotiate with the main stores there to have at least some prime display space with targeted game demos running and the games themselves right there next to the displays.
There also have been very few commercials for games run here. Halo 3 teasers and trailers weren’t even run here until around the time it was released, while Wii and PS3 commercials are on all the time.
The whole Japanese market is different from the US market too. There are probably more adult gamers than children in the US now, and they want grown-up games. In Japan, the few adult gamers are mostly otaku (which has a fairly bad connotation in Japanese) or those who don’t think of themselves as “gamers” because they play casual games, puzzle games, or light RPGs. People here grow up and stop playing games around middle school or high school, so there’s no growing base of people who continue to play and enjoy games throughout their youth into adulthood. That means that simple, casual, faddish, and kiddie-style games are more likely to do well than serious, realistic, detailed, gamer-oriented ones will.
While the Wii is capitalizing on that mostly untapped non-gamer market, both in Japan and abroad, the 360 and the PS3 almost entirely have games made for gamers. There’s very little that’s female-oriented, or child oriented, and there’s a severe lack of casual or puzzle games for sale at game stores. The 360’s online marketplace is basically unknown. That’s where all the games that would appeal to the casual crowd are, but most people don’t even know about that. In many cases, they might just prefer to get something similar on the DS instead, though.