“There are so many issues we have to solve, and the biggest challenge is that the market in Japan is shrinking — they key is gaining success in the US and Europe,” stated the exec. “At the time of the original PlayStation the Japanese market was one third of the global market, and production costs weren’t that high — so we were able to generate profit from that market alone.

“But now we’re in the era of the PlayStation 3, and the Japanese market is only one fifth of the global market — when it comes to production costs, those are swelling, so it means that unless we gain success in the overseas market our studio will go bankrupt,” said Kobayashi. “It’s a crisis we recognize.”

Found on Kotaku this morning from Yasuhide Kobayashi, the VP of Sony’s Japan Studio.

I know it is the running joke right now in gamer circles to deride the Japanese for lazy game development, and for the most part its earned. The last great Japanese games were early to mid through the PS2 life cycle, which was almost a decade ago at this point. But to see a decline of this magnitude is amazing.

It also makes me wonder about way the numbers are being judged. Titles sold or dollars spent? Japan sells more hand-held units than anywhere in the world, and a DS game costs about half of what a XBOX 360 or PS3 game costs. The numbers could be skewed toward places where people sit on their asses in front of giant flat screen TVs instead of where people play games on commuter trains.