Nothing you just said makes sense. For one I wasn't just focusing on 1P; I also included 3P. And, relative to budgets, SIE have had a lot of good to great successes in the Japanese software market with previous consoles. Arc the Lad, Parappa, and the Boku no Natsuyasumi games are some examples of that. Then we get to 3P, where games in IP like FF and Dragon Quest were selling more on older PS consoles, even ones like PS3, than they are today on PS5. But if you want to wall off "great" as games that only sell 8-10 million or more copies, then of course you're going to rule out a lot of otherwise viable releases from SIE and 3P in the region on older PS consoles, regardless of if the profit margins were better due to lower budgets.
Japan Studio was partly closed down because SIE just did not market their games well enough, and chose bad times to release them in. They also wanted to have more funding for mega-IP like Spiderman and GOW and Horizon, so they cut back on smaller studios and games to redirect their money to the other studios. Japan Studio fell victim to that strategy. So their closure isn't as simple or clear-cut as you want to make it out to be. Their games weren't massive sellers, but they helped bring identity to PlayStation as a platform and served a niche who were otherwise not interested in the mega AAA games.