"I love Japaneses games and I miss them dearly"
Play more handhelds! That's where the Japanese developers are focusing their energy now.

Not all Japanese game companies are having this issue, though. You're just focusing on the most visible and broad brushing from there.

What about Capcom, Sega, or Konami, all of whom have been publishing and/or developing games pretty regularly throughout this console generation? I'd even point to From Software and their relatively short development cycles for their critically acclaimed Souls and Armored Core series (between one and two years).

Hey, I liked The Bouncer.

There's been a bit of a fundamental conflict between modern consoles and Japanese style development. Modern consoles require tons of effort to produce a polished, fun game. Most western developers got around this by using shared toolsets, reusing assets, and having externally produced art. 

Japanese developers kept trying to build their own engines and build each game from scratch, which gets increasingly harder on modern consoles. FF13's engine is an attempt to change that and keep using a common engine through multiple games, but it still took them years to get it ready. Not to mention their audience in Japan fled to portable consoles.

Most of Japan's best RPGs of this generation came out for the PSP or DS, but because of the lackluster following of psp over here and the lack of success of DS rpgs, most sadly didn't get brought over. At least we've gotten a fair number of the oddball titles from the likes of XSeed, Atlus, NIS, and Aksys, but very few of the bigger ones.

I thought FF13 was a fine game, hampered only by its lack of the illusion of freedom that their prior games had. FF13-2 is a good example of what you're asking for though, a quickly turned around game using the same engine and many common art assets. Just 2 years after the prior one, whereas Versus which shares a core of the same engine keeps being delayed because it has almost entirely different art assets. Like FF Type 0, it should probably not even be a FF13 title. It's an action title, so it shouldn't be a mainline FF title either. Maybe it should follow Type 0's example?

I don't know how many times I've screamed that last sentence.  Great read.  While I have not shared the same expectations from Square Enix, I know many others who understandibly expect masterpieces from the company.  Hopefully publishers understand that there is a demand in the West for JRPGs.  

As someone that lived in Japan for extended period of time I suspect that their faltering game industry is symptom of a much bigger issue; a population crisis. For years now there haven't been enough people born per year to replace those who are passing away. The government actually gave tax benefits for having more than one child. Recent years have seen an increase in births but I'm not sure how much progress has been made.

This created a smaller games market in Japan. They focus on handheld games because everyone you see on a train has a DS or a PSP. Not everyone can afford a fancy HD TV and gaming console. We like to believe that all Square-Enix games are destined for our shores but for the most part Japanese developers make games for Japanese audiences. If they think it will sell here, they will certainly send it over but their market takes precedent.

It has also been argued that many of Japan’s business have lost touch with the youth of the world because there seem to be so few young people in Japan. Those in charge have age and they have been accused of looking solely in instead of out. 

One solution, for Square Enix's case anyway, is to stop announcing games 5 years before they are launched. Gamers wouldn't be "kept in waiting" if they didn't know a product was being made in the first place. For example, no one is waiting for a Final Fantasy 14 at the moment, but if Square happened to announce it, we'd all be waiting for it and lose interest with each passing year the game is not released.