Many Japanese developers, apart from being swallowed by a truly global industry and not being able to hold their own against the tide, refused to move with the times. Many games coming from Japan are noticeably old fashioned. And not in a good, old school gameplay kind of way. Publishers like capcom and sega are nowhere near as significant as they used to be, and Nintendo, well the problems they are facing with the modern industry are plain to see. I don't need to go into why I think they are falling behind.
I do think its a little unfair to expect one country to hold it's own against the rest of the world but it used to be able to do it and now whilst there is still a great deal of good developers they are no longer the trend setters.
I think there is a stubbornness too. Look at Final Fantasy. Once the pinnacle of console story telling, XIII came out, was hated, for its boring gameplay, dour, stupid characters and the way they rolled back any semblance of true role playing (should have just released the thing in movie form) what do they do? Distance themselves from it? Vow to take on board criticisms and make the next FF as good as it can be? No. They release two others in the series, both of which are full of the same bullshit. And it's not like Square are far removed from the rest of the world, they have invested in developers across the world. Deus Ex was a fine game.
Thank christ for the likes of From Software. The graphics of the souls series have been somewhat underwhelming (not the atmosphere or world's they've created, the actual graphics) but in every way else that truly counts, fantastic games no one else is outdoing.
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