The diminishing return in graphics is a widely accepted opinion, Naughty Dog themselves have also said developers will need to find new ways to "have fun" because, although there is still loads of room for improvement, we are already seeing a diminishing return.
We can all wait for FFTSW graphics in realtime (which will happen years and years in the future, surely not in the next generation), but in the end the fact still remains that the margin for improvement is getting smaller and smaller.
GT4 is already photorealistic at times (like GT3 was, AT TIMES). The big jump in graphics has already been seen in the 32 to 128bit generational jump, and i'm not sure we will see a comparable jump in graphics in the next generation(s)...
This is all IMO of course...
I respect your opinion and agree to a certain degree.
I think we are seeing a diminishing return in graphics, with current technology. with next generation technology and next-next generation technology, we should see enourmous advances again.
as for photorealistic games, many games *aim* for the photorealistic look. like Falcon 4, Ace Combat 4, GT3/GT4, just to name a few, even though in reality, these games are nowhere near photorealistic. which to me means it looks like a movie or television broadcast. I admit games are getting alot closer to looking photorealistic though.