Let's face up to facts- For the most part, Japanese developers have been lagging behind their Western counterparts for years. Most major Japanese designers, including guys like Hideo Kojima and Keiji Inafune, flat-out admit this lagging and say their studios have to step up.
But the bottom line is that in many ways, they haven't stepped up. While we can no doubt expect masterpieces from Kojima (I still believe that's true), the days of Japanese developers ruling the roost are long gone. Domination doesn't appear to be an option any longer; mere survival might be the goal. So will the Eastern developers stage a comeback in the next generation? Will franchises like Final Fantasy and Resident Evil stop being so damn controversial, and just end up being what the fans want?
Collaborating with Western teams seems to have worked out well for many Japanese developers, so maybe they could keep doing that. The only problem is that from a technical standpoint, it really does seem to be all about Western studios leaving the Japanese in the dust (especially recently). So would advanced technology really be a benefit to developers in Japan? Or is this simply an ongoing problem that involves the Japanese trying to cater to an increasingly Western-oriented audience? Perhaps the #1 question is- Can Japan makes games that are globally appealing?