I've been hearing about the shrinking market in Japan for a while. I don't think it spells doom for Nintendo or the game industry in Japan in general, but I think that Iwata and even Yamauchi predicted this and hopefully they both have the right idea that ongoing innovation will keep Nintendo strong even if the casual market shrinks significantly.
At the same time, I don't think this is going to destroy the industry. As the article states, the consoles are reaching their saturation point (ummm...I mean, they've sold as many as the Japanese market will buy), so it's not so surprising that sales are down somewhat, especially since the PS2 is already four years old in Japan.