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Iwata makes the mistake of equating "glorious, full-blown HD" graphics to photorealism. What the additional power and higher resolution allows developers to do, is achieve a final result closer to their concept art/initial vision. The mentality he should adopt, is that developers work within a budget, and within that budget they should have the graphics fufill their potential (regardless of art style). But what it sounds like, and what nintendo have done in the past, is develop visuals up to a point which they think is acceptable and then go "there, this will do!" their treatment of the pokemon series is strong example of this.

I'm worried because this already sounds like them making excuses for game with visuals similar to wii or old HD titles. Just have a look at "New super mario Mii", its visuals are sub-par and do not do the art style complete justice. Visuals and are a key asset of any gaming experience, they are not be neglected. Not only is it something to be appreciated in isolation but visual feedback has a strong effect on how fun/engaging you perceive a particular action or process to be. Anyone who's played Naruto Ninja storm will know that the fluid animations and gorgeous effects makes the fairly shallow combat, a lot more enjoyable.