Japan still has it in them, they just need to realize it. They won't until it knocks 'em upside the head.
The 1990s were an otherworldly time for JRPGs, with many different story and character ideas, along with different engines and battle systems attempted. Final Fantasy (with IV in 1991) invented ATB systems and gave us stories and characters we could connect with. Capcom tried their hand with Western-style themes (Norse myth, dragons, and medieval-style buildings and landscapes) and playable characters being anthropomorphic animals (save for the lead hero and heroine) with Breath of Fire. Nihon Falcom (more in the late '80s but did have its 3rd iteration in the early '90s) with Ys, and Kemco with Lagoon, took the stats and experience of turn-based games and applied them to a Zelda-style action-RPG platform that today's Kingdom Hearts and the like follow. Ditto Enix's 'Soul Blazer' trilogy and Square's "Mana".....same mold. All have highly memorable soundtracks that are nowadays, being performed by freaking pops orchestras today. That's how memorable and innovative those times were.
Really what happened was FFVII. That got so huge that it jaded the whole industry and it sadly hasn't looked back. The problem with newer up-starts like Gust (who recently got bought out by some bigger company) and NIS is that their titles have the same 'pandering' issues...not just in character design.....overtly-young looking characters don't help in the 'connection' process as players like myself and I'm sure yourself too as we get older, but the same cliche stories and such. It's unfortunately a little on the dry side. Western audiences, as we mature, want more mature stories and characters. We don't want to keep playing the same young characters in the same 'young' stories. Don't get me wrong.....they are fun when I'm in the mood, but dammit, sometimes I just wanna go out there and slay a few truly fearsome dragons in an adult mindset and avatar (ala Skyrim).
I will give them (Gust) credit for trying to evolve the tired old turn-based setup though. The player has to go through an interactive world and collect items to mix and match and create new / more powerful items to use in dungeons and bosses in their 'Atelier' series.
Namco does the Tales series differently by mixing action / button combos rather than having one pick through a menu of commands.
Atlus too, they're trying to push JRPGs in the mature / adult-minded format of storytelling with their Shin Megami Tensei titles. They've been met with decent success Stateside.
I don't think it's so much an issue with the genre of JRPGs in whole. It's got ideas.....I know it. It's just like anime. The industry there has stagnated to a point where, unless your name is Square Enix, and you can push millions of copies of Dragon Quest (in Japan) and Final Fantasy (U.S.) out the door, ...the stuff that sells to mainstream gamers, you're kinda SOL as they say.
Japanese creators need to stop being (but they won't) being xenophobic to ideas outside their own borders again like they once were back in the 'golden age' of RPGs during the 16-bit era and somewhat into the 32-bit era.
Then again, it is nice that Western companies have picked up the slack again. They started the whole console / computer RPG gig with Ultima, Wizardy and video game adaptions based on the D&D systems of the time. Maybe it'll infuse new and fresh ideas for the once-storied JRPG sub-genre.