Your questions contain your answers. Too much competition in all markets but especially the domestic one in Japan (do you think all those Japanese and Korean manufacturers get together to fix prices so Sony can make money?) , deflation and a high yen (which makes the very high end, cutting edge stuff still made in Japan unprofitable to export--such as the much vaunted Sony Vaio notebooks).
Sony right now is most profitable in its games division. It's made some money from selling insurance--Sony Sompou ads are all over the TV.
A few things to remember about Sony: it's a brand that charges a premium, but it was never a comprehensive manufacturer on par with the sprawling National/Panasonic, Hitachi, Toshiba, or Mitsubishi. Sony has always used a lot of OEMs to get the job done. Aiwa was their primary, and always takes the distress load when recession comes (more or less they offload the bad news onto Aiwa to make their own books look good).
Sony is more like the Toyota of consumer electronics. They look after design and quality control and marketing, and take their cut out of the 'Sony premium' (which pays the OEMs too), more than anything a product of the awe people have for their brand. It's a tough act to set up, and Sony did it by emphasizing transistor radios when 'Made in Japan' meant junk to most Americans . It wasn't always successful; Morita almost bankrupted them over the Beta vs. VHS video standard back in the 70s. Now Sony has money tied up with things like internet banking with Softbank, which is surely sinking now that the Internet bubble is done.
You can bet the overpaid, overdressed yuppies at Sony are worried since game software is so competitive and depends on ever more powerful hardware (which they practically give away) and hit titles in the software.
Charles Jannuzi