I agree that the software industry in Japan is deficient for lack of a better word in both quantity and quality. Mainly it's the result of a short-sighted bureaucracy running industry and education. Aside from the language barrier, which is formidable but manageable, Japan had all the ingredients needed to foster a thriving software industry (mainly a talented workforce schooled in science and a hardware manufacturing industry that could supply any and all the parts, at least in the 80s and early 90s).

The cultural obsession with making "stuff" or "monozukuri" is more a romantic notion nurtured by the economic slump as America made a massive comeback dominating every part of the IT field from hardware to software. Craftsman are highly regarded in Japan but great programmers see themselves as part of this tradition and peers regard them as such. It completely ignores the fact that the video-gaming industry and even anime is "soft" driven and a significant part of Japanese contemporary culture.

On the policy side there's just not enough support for entrepreneurship in general and more so for IT. Many of the first movers in the Japanese IT bubble crossed over into establishment quite quickly and the Livedoor scandal just provides government with a massive excuse to stay conservative. The fact that both Livedoor, Rakuten and SoftBank made hostile bids for media companies at one point probably did some damage as well in terms of turning traditional media against them.

Labor laws make it highly prohibitive to fire full-time workers and social benefits still tend to accrue to people who don't change companies. Of course, times are changing but policy still prevails. For any software startup in Japan hiring someone is hard because good people are conditioned to seek stability and hiring someone is risky for the startup because they are dealing with less talented people with the same employment guarantees. Although the IT industry in Japan mirrors general global trends to a degree, so there are more career changes, people are very risk averse and probably less mobile than a comparative sample from the states.

Also corporations tend to foster a false sense of homogenity which usually results in long hours and minimal incentives for performance. I've seen so many exceptional people, especially programmers, clash and ultimately burn against corporate culture. The rest go on leave for clinical depression.

In terms of education, the curriculum just plain sucks for science in general and for sciences more students flock to traditional engineering fields where the get to learn FORTRAN or COBOL and maybe play with R. Professors in Japan, even in the sciences, rarely lift a finger and many are completely inept with computers. Of course, younger professors aren't but with Japanese demographics they'll struggle to find tenure. Not to mention undergraduates don't study much compared to other countries since the entrance exam is the main event.

In terms of culture and language, Japanese allows for so much vagueness that I think it creates a serious barrier to clear and logical thinking needed for not only programming but interface design. People avoid debates of any kind and when they do occur, they quickly get emotionally heated. Also, a lot decisions for even the interface gets run by the committee or are consensus-based and that's not a good thing in general for design of any kind as you need a grand architect who knows what they're doing and can move with conviction.

I really can't do this topic justice unless I go and write a book so I don't think a short article by The Economist can address it either. Japan has a lot to offer too but those are my impressions on what's holding them back.