Sony is gradually winding down development efforts within its iconic Japan Studio, leaving just Astro Bot Rescue Mission developer ASOBI Team and localisation and business staff to fly the flag. The team hasn't been profitable for the past couple of years as well as going against the sort of PlayStation 5 titles Sony wants to put out. Sony Japan Studio apparently wanted to develop games that would appeal to the Japanese market with the hopes of a worldwide appeal while the hardware manufacturer needed the latter to be effectively guaranteed.
One source speaking to VGC stated that the External Development Department, which helps to bring titles such as Demon's Souls to market, would continue. The supposed final nail in the coffin for Sony Japan Studio was the departure of former president Allan Becker, who left due to the developer's "lack of hits". VGC also corroborates Bloomberg's report from last year, which claimed Sony had sidelined the Japanese market during the PS5 launch.