Unfortunately, the people who drive sales are generally not the educated gamers who might be able to handle a little less graphical fidelity for some pure fun. In this HD age, if your game is not from an established franchise (Fallout, Final Fantasy) and does not look at least really good (Assassin's Creed) then most people will not pay attention to it. Assassin's Creed is the most successful 'new IP' of the generation. Uncharted 1 got hype because it was an amazing looking PS3 exclusive in a time when the PS3 still did not have a whole lot of amazing looking exclusives.

Graphics are important to the people who want to make money from their games and don't have any pedigree or gimmick to hook people with otherwise.

More importantly though, Japan is just a different culture altogether. I want you guys to keep discussing it because it is interesting, but I'll just say that it's really not fair to compare what Western developers can and have done when a Japanese developer says they can't do it, because of the culture.

Perhaps the most obvious difference is that Japan is dominated by 'low resolution' gaming systems. The PSP and the DS rule over there and it's difficult for any high budget, high definition game (without a pedigree or gimmick) to sell well enough to recuperate the development costs of that expensive game. This is why it's been so important for them to reach out to the west to sell their games and make money--but that's stuff that a lot of us already know.

Something I didn't know until recently was brought up in an interview with Keiji Inafune (English translation here--it's long), the creator of Mega Man and other Capcom properties who just quit the company basically out of frustration last week. Inafune has probably been the most vocal about why Japan sucks, technically, compared to the west. Something I didn't realize until he brought it up is that a key difference between the development studios in Japan and those in the West is the motivation of the development staff themselves.

Japan has a culture of Employer Loyalty--basically, once you work for a company, you're there forever. You're safe. Regardless of how hard you work, you're guaranteed a paycheck until you retire. In the west, especially in the recent years, a game company can disappear just like that. The attitude of the workers in a safe environment is much different than the attitude of those who need to compete to either keep their job, or be lucrative in their next job. This is especially dangerous in the bigger franchises, like Final Fantasy, where they can say 'towns are too hard' out loud, but then they are thinking 'but you are all going to buy it in droves anyway and I'm still getting my paycheck'. I know FF13 had other circumstances, but the attitude of 'oh well, we give up' is something that just won't happen in a competitive employment environment.
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To be honest I lost interest in writing this about 6 times tonight. It's not finished and not proofread, but I don't feel like wasting all that text. Sorry for this incomplete rambling.