Why did the Dreamcast fail IN JAPAN?

The general reasons for the Dreamcast overall unspectacular sales of 10 million are:
 
1) The Saturn didn't interest enough people (it was seen as too hardcore/niche I say- I mostly associated it with fighting games) so Sega didn't have enough of their userbase left to guarantee that even a superb console in the next generation would have people's trust and attention .
2) Confusing the market with the MegaCD (which was a decent idea I say) and 32X (which even Sega admit wasn't a good idea) and
turning people off Sega's overly complicated and usually short lived gaming messages.
3) Not being able to play DVDs. Perhaps in that small window around 1999-2001 having DVD in a console was important to a lot of people. But not by the time that the Wii came when everyone already had some kind of DVD player.  And I kind of prefer that the Dreamcast can only games and CDs. It means it's still a pure gaming console, not trying to be a jack of all trades for the sake of it.
4) Includng the above reason, the Playstation brand. It was understandable why the PS1 sold more than the Saturn and that set the Playstation 2 up to be of interest to people. Also, if you now saw cartridges as old hat, some may have been were wary of Nintendo's consoles just looking increasingly toylike.
 
Also maybe the Dreamcast didn't have enough of the types of games that people were comfortable with. Instead it was quirky stuff or it had loads of arcade games. Too much too soon to some people. All style and no substance is how Sega is still seen by some.
 
Also, it was expensive to start with. 300 pounds in the UK. The PS1 (at 150 pounds) and N64 (at 250 pounds) were still being sold to newcomers to that generation and they were more of a known quantity. Sega had essentially seemed to go off the radar in to some weird niche to many UK consumers after the Megadrive and there was no guarantee that the Dreamcast wouldn't end up being just an extravagant, expensive, and short-lived piece of Sega wackiness. Which some who didn't like all those arcade titles could still say it mostly turned out to be.
 
All that said....
 
 
WHY DID THE DREAMCAST FAIL IN JAPAN? The Saturn did well there apparently. Was it, as it seems, simply that the Japanese always favour Sony products if they are an option, that they are actually creatures of comfort rather than interested in cutting edge innovation?

You have to take into consideration that in the end, it's about brand loyalism and marketing. One big reason the Saturn fared so well in Japan, (the PS was booming there too) was the Segata Sanshiro marketing and lots of niché titles.

By the time Dreamcast was out it was far too late for the brand itself. Shoichiro Irimajiri couldn't compete with the next big gaming Idol: Ken Kutaragi and his exotic hardware and wild promises.

SEGA also had a history of friction and misunderstandings between the eastern and western divisions.Most japanese fans seemed to perceive that the company was weak and basically destroyed by incompetent westerner management and shareholders.

Nintendo and Sony were the safe brand then for a lot of big and small factors, Nintendo and Sony were (at the time) pure japanese companies (whereas SEGA, Service Games, was a US company until Hayao Nakayama was put in charge of SOJ in 1979). 

Bernie Stolar seemed to have a great deal of responsibility, he greatly eroded the company's image, starting with SEGA of America by sending confusing messages, by not allowing most RPG's to have a western release, (that was the coup de grace by Sony, having lots of RPG's in the west), he then proceeded to further dig in the wound by publicly declaring the Saturn dead several MONTHS two years before the Dreamcast was even out. It's a shame it all crumbled down, because SEGA had a great team known as SEGA technical institute in the US.

They were sending a confusing message, being unrespectful to developers and the userbase, and frankly I+D was out of control, the CDX, the NOMAD, the never released Neptune (basically a Genesis+SCD+32X= Almost a Saturn with an absurdly constrained bus and other bottlenecks). Hence why pachinko tycoons and shady private japanese businessmen said "***k it" and took over (or so they say) and sorta tried to rescue the company's image in Japan.

PD: The Dreamcast used ~1.2Gb GD-ROM as optical storage