No they won't. The reason why is due to "value innovation" - a cornerstone of Nintendo's stated strategy. Value innovation means changing what consumers want out of a given product. Why doesn't Wii Sports have graphics on par with Super Mario Galaxy? Because Wii sports is meant to alter the consumers expectations. It presents the player with a new metric for fun. Up until the Wii, games with impressive graphics have had high value. Iwata is now trying to turn that around, and has stated as much many times. When he said that graphics had reached a saturation point, he was really referring to what drives consumers to buy games. Judging by the buying habits of most consumers, advanced graphics are not worth the extra cost of the HD consoles. Instead, games like Wii Sports, Wii Fit, and even Mario Kart Wii, are training consumers to find value not in graphics, but in physical interaction and social play. Wii Sports would not be anymore entertaining in HD, but it would suck on dual analog. Pachter predicted a Wii HD update in 2009 to improve video output. Instead, Nintendo is releasing Motion plus in 2009 to improve physical interaction. This is value innovation.
The purpose of this value innovation is to shift the advantage away from Microsoft and Sony - who can always outspend Nintendo on graphics technology - back into Nintendo's favor, where being an integrated hardware and software manufacturer gives them an edge when creating physically immersive games. Putting the emphasis back on graphics or attempting to compete graphically in any way would completely throw away Nintendo's competitive edge. Nintendo will never again have a graphically superior console, lest Sony and Microsoft wholeheartedly embrace Nintendo's strategy.
This is probably the most accurate way to guess how powerful the next Nintendo console will be, in whatever year it launches.
There's plenty of reasons to not launch a new console when you are the market leader. The PS3 has shown us all of them. Brand loyalty is weak in this industry, and thus you can lose your user-base. You can lose your game library advantage if developers don't embrace your new platform - thus decreasing the incentive for consumers to buy your new console. And you risk losing a lot of money on R&D and marketing. Even a conservative company like Nintendo can suffer from an unsuccessful product launch. I imagine they would have posted losses during the Gamecube gen had they not had the GBA.
:lol People said the novelty of Wii Sports and "waggle" would wear off, then Nintendo announced Wii Fit. I'm too lazy to dig up the quote from Iwata, but he basically said that the purpose of launching a new console was to provide the consumer with new experiences (as opposed to technological upgrades). Nintendo has shown that as long as they can provide new experiences with a new game (or new game + peripheral, see: Wii Fit, MKWii, AC), they don't need a new console. I believe this will be their strategy going forward.
The competition is irrelevant.