Because innovation tends to come from younger people who have bright ideas, or want to make a name for themselves, or simply because they have free time.
You also need other people to work with, so even if you have an idea, it’s much easier when there are a lot of people in the area with the right skill set.
With a significant declining trend in population, especially in younger people, there just wouldn’t be as many opportunities.
Japanese software is not the only place where we are seeing a decline in innovation. This is the country that that provided us a lot of modern electronics as well.
35% of people are now over 65 in Japan. A much larger percentage of the economy now has to be dedicated to taking care of the elderly. The percentage of elderly in 1950 was tiny.