Videogame arcades have supposedly been "dying" for about a decade now, but in reality they're still a fairly important part of Japanese life. Arcades (or "game centers," as they're referred to here in Japan) tend to thrive in all sorts of locations around the country, but there are now various types of establishments catering to different groups of players.
The grotty, smoke-filled caverns of Akihabara and Den Den Town remain, kept in business by the 100-yen coins of Virtua Fighter enthusiasts, mech game fans and the enduring (but diminished) 2D fighter/shooter hardcore. You won't find many "ordinary" people in these haunts, as the majority of these arcades (particularly in Osaka's Electric Town) haven't changed to accommodate new game styles. But in a way, I think it's encouraging for the arcade scene as a whole that so many of these little joints are still operational.
It would be a shame to see these dingy arcades die out, but there's no chance of that happening as long as developers continue to supply updates and sequels to the game center loyalists' favorite games. Tournaments for players of games such as Virtua Fighter 5 are still held quite regularly, too, so there's always incentive there for dedicated players to remain in the fold and rise through its ranks.
Bigger Japanese game centers, however –- particularly those that are part of even larger entertainment complexes comprising attractions such as bowling, karaoke and indoor sports –- have changed dramatically in recent years. These establishments have moved away from targeting the chain-smoking youths (and older generations of aging youths) who hang around the dimly lit game centers I was describing earlier; the new target demographic of these places seems to be "everyone/anyone."
Part of this shift has been directed by arcade game developers –- particularly Sega -– who have moved some R&D teams away from traditional one- or two-player cabinets and into the production of linked table-and-chair machines, which enable locally networked play for up to a dozen players at a time. Combine this style of play with the friendly software that is run by these communal machines (a spread of "light" RPGs, quizzes, horse-training simulators, and pop group management), and the result is a setup where middle-aged women sit down to play against businessmen and young couples. It's certainly an all-embracing scene, no matter how bland it might seem to gamers who were reared on Street Fighter II and Raiden.
Unfortunately, in these large locations even the latest standard coin-ops are often left showing the "Insert Coin" screen: They're simply not as popular as the big networked productions. Fine games such as Initial D Arcade Stage 4, House of the Dead 4 and the coin-op version of Nintendo's Rhythm Tengoku are attracting only a small fraction of the number of players hooked on sit-down/link-up titles such as Derby Owners' Club. On recent trips to these mega-arcades, the only traditional game I've seen still cutting it is Mario Kart Arcade GP 2, which is apparently enjoying a resurgence in popularity thanks to the huge success of Mario Kart Wii.
Really, the Japanese game center scene has been split into two separate camps: The all-welcoming arcades where families can spend an afternoon playing with UFO Catchers while Daddy trains his football team on one of Sega's networked operations, and the eternal underground of dirty, noisy game centers where highly skilled gamers still congregate to smoke and play well into the night. I don't think arcades are ever likely to die in Japan, but they will inevitably continue to morph.