CouchMonkey: You know you are right. It is a huge threat. Here is what Sony is thinking though. They obviously have a system better than Nintendo, and as such they can win back Japan once more units are available.
Unfortunately, it doesn't really work like that. Once Nintendo has a couple million units sold in Japan, a successful user base is already installed for third party developers. And Nintendo still has big guns to launch to help build the user base for Wii even larger in Japan.
We already saw that the Nintendo games can boost hardware sales when we saw the success of the DS because of game releases such as: Brain Age Training, Nintendogs, New Super Mario Bros, Pokemon. And now the DS is in an unbeatable commanding led in Japan.
What happens, when Nintendo can continue large supplies of Wii hardware and starts launching great software that attracts more gamers?
Sony loses its market it dominated.
Now lets go to the US with Microsoft. Xbox 360 and PS3 despite what Sony wants you to believe are not that drastically different. In fact, I am pretty sure you can do the exact same games on either system with minor or no noticable differences. That does not build confidence for the consumer when you ask them to spend $100-200 more for your system. Not only does Xbox cost cheaper it has more games already, and has a substitute product for major game that the PS3 has available. The casual gamer will not see a difference between the two. And the hardcore gaming crowd will support Sony for those Japanese exclusives that Sony always gets...except that they aren't getting them as much anymore...because they lost Japan. Huh.
So, although this doesn't paint absolute despair for Sony, because this is only one possible scenario for the future...but even the possibility of this happening should scare Sony.