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.
