There are plenty of ways to handle reducing Yamatai to a more managable size without actually killing it.
The Empress begins setting up 'protectorate zones' where those unsatisfied with her rule can move to and begin setting up their own infrastructure and governments. Yamatai will foot the bill for defense for X number of years, or until the systems can defend themselves.
Throw out a civil war plot. Fracture Yamatai that way. Massive event, loads of drama and fun and player interaction, everybody trying to get a piece of the pie as the largest power in space falls apart at the seams and tries to hold itself together.
The NMX return with a brutal series of attacks using recovered Black Claw Empire tech, ripping a bloody trail through many systems, fragmenting the current structure of politics, allowing the rise of new powers and the fall of old ones as everyone reprioritizes.
There's a thousand better ways to handle this that'll promote tons of roleplay, story telling, etc. The reduction of Yamatai's size, if it is NOT a pure retcon, probably should be a HUGELY significant event in the history of the game.