I think a Hayao Miyazaki quote perfectly encapsulates the struggles Japan is facing:
"You see, whether you can draw like this or not, being able to think up this kind of design, it depends on whether or not you can say to yourself, 'Oh, yeah, girls like this exist in real life.'"
"If you don't spend time watching real people, you can't do this, because you've never seen it."
"Some people spend their lives interested only in themselves."
"Almost all Japanese animation is produced with hardly any basis taken from observing real people, you know."
"It's produced by humans who can't stand looking at other humans."
"And that's why the industry is full of otaku!"
Too much commercial media in Japan is focused around what they think looks the most appealing...They don't design art for art's sake, they don't design art based around a human form...they design art to sell based on commercialized fetishes.
If you dig into it, it's cold and calculating, and it's a reflection of a culture where individuality is suppressed. There are of course exceptions, like Falcom's Trails in the Sky, but they're not the norm in the slightest.
That's why I've been playing Western RPGs a lot more often because they delve into the uncomfortable realities of life, including more thoughtfully designed characters. They aren't perfect by any means, but nowadays they tend to design more around function....rather than just make up something crazy and then throw it into a world like this:
As a corollary to this post,...
I just wanted to say that as a woman, it really doesn't bother me when women are sexy or show lots of skin in a video game. I don't even mind the fanservice-laden Dead or Alives of the world all that much. I'm not a prude...I dress in skimpy outfits all the time, especially when it's hot out...and I try to be as sex-positive as much as I possibly can.
But when I play games or read or watch shows / movies, the character's personality or the narrative has to reflect it. If she's a brash, bold seductress who runs a whorehouse and traps a wealthy monarch with her sexual prowess, a sexualized design makes sense. If she's an elven dancer performing on a stage at the capital city, a sexualized design makes sense. If she's on a sultry beach on a tropical island, a sexualized design makes sense.
This only really bothers me when you have characters like Pyra from Xenoblade Chronicles 2 (shown in the quote from my earlier post) where she's shy and kind and gentle and gets flustered easily...but she's dressed and designed like she's a hyper-sexual being everywhere she goes. There is nothing about her personality or the situations she's in which would compel her to dress like that. I shy away from that sort of dissonance in my entertainment because it's a hallmark of low-effort and low-quality design and writing.
I put myself in the character's shoes. If I personally wouldn't dress like that in that type of situation, I don't want to see it being represented because it breaks my immersion. The exact same goes with male characters. Form has to follow function. If the character doesn't make sense, don't include them. I've been an author for 13 years and that's one of my cardinal rules.
The tragedy behind Japanese entertainment is so many times form does NOT follow function. It seems like you have otaku designers (or designers influenced by otaku sensibilities) who create characters first, AND THEN the world comes later. So instead of thinking something like: "Would this make sense in this fantasy world? Does this fit in with the culture? Would her role in this society allow for this?"....they just think "Kawaii desu ne!" and it gets created because she's either cute (moe) or excessively sexualized. For me, that doesn't make them a character in a world. It makes them nothing more than an archetype...and I've read too many books to bother with one-dimensional archetypes who exist solely to fulfill a niche without any thought to their placement. It's a fatal flaw in writing which destroys a book 99 times out of 100...and if you look at Japanese media through the same critical lens you'll see it abound.
That's why I have a love-hate relationship with Japan. When Japanese art is good, it's SUBLIME (like Kino no Tabi, Satoshi Kon movies, Makoto Shinkai movies, or Falcom games). But you have to sift through mountains of trash to get to those gems, and it's unfortunate that so many fans both domestically and internationally willingly champion this narrative laziness.
Ironically, if you ever play some of the fan-translated Super Famicom JRPGs, you'll find that Japanese designers used to be much more vibrant and thoughtful with their character designs despite their incredible simplicity...back when teams were very small and intimate, and the otaku fandom was in its infancy. You know, something like Chrono Trigger or Final Fantasy VI. It was peak creativity for Japan, in my opinion. Back then there wasn't even any stigma about Japanese games being "weird" or "for otakus"....they sold JRPGs in the West as regular RPGs and no one cared. I wonder why that's why I love my old SNES games so much today?
Western RPGs---especially modern Western RPGs---tend to be better about this (although they certainly have their moments). They'll design the world first, and then think what characters would live and thrive in that world. They'll unabashedly design a character super-sexy, but they'll give sufficient context behind it. It's a more mature level of story-telling and I've found I crave it more as I age.