I think if you work in an analysis of the exception to the rule - the success of Japan's outsize piece of the gaming industry - you'll have something really, really compelling.
I do not know if the Japanese gaming industry is an exception rather than of the rule. I see the game studios as part of the larger entertainment segment in Japan -- anime studios, music studios -- where it is actually very top-down vision driven by strong hands-on head figures like Hideo Kojima or Hayao Miyazaki. AAA titles (of games or motion pictures) have very different production, finance, and life cycles from typical dozen-person-developed consumer apps.
An illuminating question is, is Japan a leader in boutique shop games?
I think that's a misconception. AFAIK, the size of game development teams in Japan is generally smaller than that of Western teams, on average. Particularly in the industry's heyday of the 90s-early 2000s, teams were small enough that employees would be asked to wear many hats. For example, Tetsuya Nomura was famously hired by Square to be a creature artist, and found himself contributing in so many areas that he was eventually asked to direct. This includes on games like Final Fantasy VII, which at the time of release was one of the most expensive games ever produced.
Maybe it's a matter of Japanese firms becoming rigid and hierarchical at a faster rate in their lifecycle than Western firms do.
Japan is not leading the video games industry anymore for a long time now. They still have a good chunk because of strong long lived IPs but it's heydays are in the past
Japanese AAAs seem to be heading into the same slump as Western AAAs which is going to be more of a problem for them, since Japan has fewer indie and AA developers than the West, while Chinese competition is also growing, but I would neither say things have been this way for a long time, nor that Japan isn't still punching above its weight in video game sales and influence.
> but I would neither say things have been this way for a long time
What do you mean? It's fairly clear that most of the innovation in Japan was in the 80s and 90s. Since then, there's hardly any outstanding titles coming from Japan. Every year at the TGS it's just remakes and sequels or prequels. A sign of a dying industry.
> still punching above its weight
I'd call that inertia. But you already see that signs of decay: Final Fantasy is selling less and less, Capcom relies way too much on Monster Hunter for their own good, Konami is mostly dead (selling remakes contracted to third party studios), SEGA may be the most successful but that's mostly thanks to Atlus at this stage. Even Sony has hardly anything to show in their first party line-up. It's getting depressing.
Sequels aren't a problem if they're continuously improving on their predecessors. Setting aside Atlus which you already mentioned, and stale N+1 sequels, we've got: Square Enix with Octopath Traveler and Dragon Quest Builders recently (which improved with their respective sequels), From Software with Sekiro and Elden Ring, and Nintendo with Breath of the Wild (and its improved sequel).
However, I think in the main you're right (the industry is slowly dying), I just don't think it's as manifest (or irreversible) yet. I do think if Nintendo and Game Freak prevail against Palworld, things will get bleaker for Japanese development, though.
