Sony's (NYSE:SNE) PlayStation 4 is currently the undisputed champion of the eighth generation console race, hitting the 10 million unit mark faster than any previous PlayStation console. However, Sony is being crushed by Nintendo (NASDAQOTH:NTDOY) in one key market: Japan.

To date, the Wii U has sold 1.9 million units in Japan, compared to 680,000 PS4s, according to Vgchartz. The PS4 launched in Japan more than a year after the Wii U, yet the PS4 is barely outselling the Wii U on a weekly basis, according to Media Create. For the week ending on September 21, the Wii U sold nearly 8,400 units, compared to more than 8,900 PS4s.

The launch of Bayonetta 2, a Wii U exclusive, sold nearly 39,000 copies and finished the week as the third-best-selling game in Japan. The two top games in the country, Super Smash Bros. and Yokai Watch 2, were both 3DS games.

Bayonetta

Bayonetta 2. Source: Nintendo

Speaking of the Nintendo 3DS, the handheld console remains the top selling console in Japan, with the LL (XL) model selling nearly 36,000 units during the week. Sony's PS Vita finished the week in a distant second with sales of over 11,000 units.

So, why is Sony losing so badly in its home market while crushing its rivals overseas? Let's take a closer look at the situation to see if Sony investors should be concerned.

Understanding the Japanese gaming market
The Japanese market is defined by a lack of PC games, the decline of home consoles, and the dominance of handheld and mobile games.

This shift is generally attributed to busier Japanese lifestyles and the rise of "monster hunting" games like Pokemon X/Y, Yokai Watch, and Monster Hunter. Meanwhile, the Japanese preference for cuter, anime-style characters and story-driven games meant that gamers didn't consider raw horsepower and realistic graphics to be top priorities.

Images

Monster Hunter 3 Ultimate. Source: Capcom

As a result, the PS4 -- which launched with triple-A Western titles like Call of Duty: Ghosts and Assassin's Creed IV: Black Flag -- was less loved than the Wii U. The PS Vita, which notably lacked Capcom's hit series for the PSP, Monster Hunter, was crushed by the 3DS. This widening rift has made it confusing and difficult for Western companies, like Microsoft (NASDAQ:MSFT), to break into the Japanese market on triple-A games alone.

Should Sony be worried?
However, Sony probably isn't worried about Nintendo's dominance in Japan, because the North American and European markets now dramatically outweigh its home market in overall sales:

 

PlayStation

PlayStation 2

PlayStation 3

PlayStation 4

Unit Sales

104.3 million

157.7 million

83.4 million

10.3 million

Japan

19%

15%

12%

7%

North America

37%

34%

34%

43%

Europe

35%

35%

40%

37%

Source: Vgchartz

By comparison, Nintendo has retreated back into Japan with the Wii U, and is depending less on the North American market with every new console. That's a bad sign for Nintendo, considering that the North American market is much larger than the Japanese one.

 

N64

GameCube

Wii

Wii U

Unit Sales

32.9 million

21.7 million

101.1 million

7.2 million

Japan

17%

19%

13%

27%

North America

61%

58%

45%

43%

Europe

19%

20%

33%

24%

Source: Vgchartz

A blessing, a curse, and the rise of mobile games
Winning the Japanese market is a positive development for Nintendo, but it also forces it to launch games that appeal to Japanese gamers before Western ones.

Certain games like Mario Kart 8 and Super Smash Bros. have great international appeal, but Japan-centric games like Yokai Watch and Dragon Quest are generally less popular with Western gamers. Meanwhile, Sony can simply focus on big budget triple-A titles that appeal to Western gamers to dominate the Xbox One and Wii U without the support of the Japanese market.

Screen

Super Smash Bros. for Wii U. Source: Nintendo

Nintendo's success with handhelds in Japan also distorts the threat of mobile games. Gartner estimates that the value of the video game console market will rise 11.5% year over year to $55 billion in 2015, but the value of the handheld console market will fall 18% to $12.4 billion.

However, the value of mobile games could surge 28% to $22 billion next year. This means that 3DS sales could slide and Nintendo will be forced to launch mobile games -- which it has repeatedly refused to do. Last December, Japan surpassed the U.S. as the world's largest mobile gaming market -- which likely contributed to 3DS shipments plunging 41% year over year last quarter.

Sony, on the other hand, clearly recognizes the threat of mobile games. That's why it's working on cloud streaming solutions (PS Now) and mirroring solutions (Remote Play) to tether handheld and mobile gamers to its home consoles and PlayStation ecosystem.

A Foolish final word
In conclusion, Nintendo crushed Sony in Japan, but it might actually be a curse for the former and a blessing for the latter. The more Nintendo concentrates on the demands of the Japanese market, the further it drifts from Western gamers. Sony will likely brush off mediocre sales in Japan as long as it can keep dominating Western markets.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.