Over the past 3-4 years gaming has changed considerably. In 2005, the Xbox 360 was released, and then in 2006, the Playstation 3 and Wii were released. Obviously, we're in a new era of gaming with which consoles are on the market, but the considerable change has been the paradigm shift from Japan's dominance in game development to Western. And by Western, I mean Europe and North America, the "western" civilizations.
From Nintendo's "splash" in America in 1985 with Super Mario Bros., and later with Legend of Zelda, and Metroid and Sega's Sonic the Hedgehog, Western development had been behind the curve. Maybe because we never really thought of gaming as a mature medium. Most western games were lower quality copies of their Japanese counterparts, while Nintendo and Sega were iterating on their ideas. Capcom created Mega Man and Street Fighter, Konami created Castlevania.
There were definitely a couple games that were born in Western game development that established genres as well. ID created Wolfenstein and Doom, Westwood created Command & Conquer, and Blizzard created Warcraft. But these First Person Shooters and Real Team Strategy games were absolutely foreign to Japan. There is something distinct and exclusive to Japanese culture that I'm not sure anyone has ever defined. If something foreign does not resonate with these ideals it will not be adopted.
Japan is also incredibly nationalistic and narcisistic at times. It's only natural that when they're on their game, they become full of themselves. I'm sure this is where the term Youge originated its discriminatory meaning.
Youge literally translates as Western Game. "You-" (洋) is the prefix for Western things, and Ge is short for Geemu (ゲーム) or Game. It's discriminatory double meaning has been born out of their dominance and disregard for Western game development.
From their 20 year dominance over game development, Western Games have been seen as second class in Japan. 32-bit era games and last-gen games like Metal Gear Solid, Legend of Zelda Ocarina of Time, ICO, Shadow of the Collosus, Okami, Final Fantasy VII and Final Fantasy X did things with story and gameplay that truly brought maturity to gaming.
For me, everyone of those games I've gotten emotionally attached to. I cared for the characters and story. There wasn't any game that came from the Western side of things that made me feel anything beyond the normal enjoyment of the game.
But that began changing with the Xbox. Western developers now had a video game platform outside of the PC, and began taking some of Japan's ideas as their own. Games like Grand Theft Auto 3, Halo, Star Wars: Knights of the Old Republic, and Prince of Persia Sand of Time were mature products that had mass appeal but were uniquely Western.
In today's era, there have been an incredibly few Japanese games that have done anything interesting. Dead Rising, Metal Gear Solid 4, Legend of Zelda Twilight Princess and Super Mario Galaxy are just about it. They stand along-side far more Western games such as Halo 3, Mass Effect, Oblivion, Bioshock, Grand Theft Auto 4, Dead Space, Fallout 3, Batman Arkham Asylum, and Dragon Age.
Kotaku had an article this morning translating Youichi Wada's (CEO of Square Enix) news report about their upcoming release of Final Fantasy XIII and the recent worldwide release of Modern Warfare 2 (here). He says that Japan needs to get over this discriminatory meaning. Western games are truly leading the world, and Japan has got to face facts and recognize their success.
Wada isn't the only one. Keiji Inafune said the exact same thing during Tokyo Game Show this year, exclaiming, Japan is over. We're done. Our game industry is finished." Evolve or die.
Final Fantasy XIII will definitely be a test for Japan. Will a game that pure Japanese have the worldwide appeal that it's had in the past? Will XIII inspire game development the way VII and X have before? I really wonder if I'll enjoy it having given up on Japanese RPGs.
I think the only other games worth mentioning on Japan's horizon are The Last Guardian and Legend of Zelda Wii. Everything else is just an unoriginal copy-cat.
Also, 1up has an amazing article from Sept 2008 about The Rise and Fall (and Rise?) of Japan that explains all this far better than I attempted.