I do agree to an extent that the emotional core, somewhat more complex storytelling, and most of all the personality of diverse casts of characters was one of the biggest draws to a Japanese rpg back in the genres glory days. Going back to the SNES era and then going forward a bit, a larger amount of japanese rpgs just tended to have a lot of personality than their western counterparts. Sure there were also some games on the western end that weren't like this and likewise there were some pretty dreary, lifeless games on the japanese side but by far Japanese rpgs were doing things with characters that had tons of personality, an interconnected and narrative based plot, and had decent to even great gameplay to back it up. This isn't saying there weren't fun-RPG esque games outside of Japan, but nothing like Chrono Trigger was being made outside of Japanese shores; something that mixed good gameplay, great visuals, and a really fun and different (for games at the time) story that intermingled with the gameplay superbly.
I think what Sakaguchi is getting at isn't that emotions are -still- the biggest draw of japanese rpgs, but that they -were-. Jrpgs have definitely suffered a problem of stagnation in not just gameplay and innovation, but in terms of story, characters, and what's done with those characters. I couldn't believe in FFXII...that despite being in Ivalice which has to be one of the most diverse and colorful worlds the series has ever produced, subjected you to playing in a party of nothing but same faced Humes (and token elf gir-, Viera.) It is definitely one thing that could step it up a bit.
Granted that's one of many issues that could be addressed; better gameplay, and the problem of linearity....I think the Mass Effect series proves that a game can still have a highly narrative story that's not completely linear. That's besides the point of the article though and I don't want to turn this into an article itself, but yeah story is definitely one thing that's taken a hit too I think.