There's a difference between Japanese RPGs and Western RPGs: JRPGs use a wide array of creativity, they blend sci fi with fantasy and it can usually stick. While WRPGs usually go out to set themselves as the Lord of the Rings of the gaming world(ironic since we already have such a game, several even!). The medieval setting of many novels, movies, and fiction is perfect because this is an era where most of our childhood fables were born: Merlin, King Arthur, Excalibur, it was the well of Fantasy we continue to draw from. Setting an RPG today with Western techniques can be... sketchy. If it's set in today, we are going to be using guns. Even if it's gotta do with demons, we'll use a gun. You could argue with,"But-but the demons can only be killed by magic metal!," and they can counter-argue with,"So the bullets and knives are made of the same thing." We use that era because it's good, when we want an RPG, a true RPG, we choose the one fulla magic, swords, and dragons.
But yeah, any later era of other than the medieval era, is going to feature some type of machinery or magic. Games like Fable and Guild Wars 2 are starting to break away from it a little bit, Guild Wars 2 is going to feature a lot more machinery and just as much magic while Fable is going to branch of to the next era of world-history(WWI, if you haven't been noticing, the Fable games have been going off eras of importance to the world). When people say RPG, they want fantasy, they want swords and magic, they don't want a spec of reality in there, because it's boring.
SO, to restate why we chose this era, allow me to give a brief comparison between the 2 types of RPG
-JRPG: Quirky, goof,y kid-friendly, goes out to entertain and maybe tell a story, and also tends to disobey rules set for a fantasy world.
-WRPG: Sets out to create an epic. Love, heroes, magic, legends, they're all there for telling a story and making the magic happen
I guess the main fear is guns.No matter how late the era will be, there is going to be a gun. If you set WRPGs in later eras you get Borderlands, Fallout, etc.(which isn't bad). It works with Jedi apparently enough... SO why use the medieval era, it's the birth place of fantasy and lore and choosing a later era will usually tend to involve guns, a la Alpha Protocol.
THE KEY THING TO REMEMBER HERE is time. Time is the key, it can make the mountains bow and dry up the greatest oceans, but we must stick to it. I'm not saying it's impossible though. If someone created an urban fantasy game, they could rip-off the fighting mechanics of the magi from Dragon Age II and it will stick.(Loved it)
(Though my hat is off to Atlus and the Persona series for both setting an RPG in the modern era while using close-range/primitive weapons. They pulled it off well.)