"Overseas media have been asking the same question for a long time; is Japan’s game industry okay? Are Japanese brand games dead? The fact they've been asking these questions for a while is because they care and they’re worried about it.
"So we much appreciate the fact that the world is concerned, however, [Japanese developers] still don’t really get it. Some developers are saying [the] Japanese game industry is still doing fine, but that’s wishful thinking. Words are not enough, we must act and prove it. Unless at least a few titles from Japan make it to the top 10 games of the year worldwide, we won't prove it."
I do love Inafune's honesty on the subject, but really, at this rate I don't think we can isolate any one market as especially worst. Japan definitely needs to shake itself up and get over its stagnant period, but the same can be said of Western development these days. Maybe people pick on Japan more because it's so much more invested in the console business, which is where a lot of the industry problems are found.
In any case, I think it's wishful thinking to say anywhere is doing fine right now, at least in the high-stakes areas of game development. The whole world market looks like a mess.
Is the Japanese Gaming Industry Recovering? [IGN]
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