Kojima: "Next level of gaming" not yet possible

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I feel he is maybe trying to say a living world with realistic vegetation systems etc.
Sure, but his analogy wasn't too great. Do you know how long it takes for plants to visibly grow? There's a real good reason stuff like this isn't in video games, and it's not a limitation on CPU power, so much as a limitation on usefulness, or bringing interesting things to the table.

Even real crumbling and breaking of scenery is quite basic these days, imagine in an fps where bullets realistically destroy scenery with nothing precalculated in a full game with full ai, vegetation, great graphics, physics and 32 human players.
So kinda like Crysis? Even that Russian WW2 strategy game (which name escapes me) from yokes ago had realistically destroyable landscape features. Unfortunately it was so realistic they had to throw in balance aschewing "mechs" with equally absurdly large weapons to show off the technology, because as it turns out, a regular rifle round, fired into a brick wall, does practically no damage at all. In the real world too.

He'll want hair on characters growing naturally and not just some presets,
Sure, but why? With the possible exception of an MMO, what game exactly are you intending to play that takes long enough for you to notice, that your main character hasn't shaved this morning? Seriously? Why would you even want to?

It seems that more and more devs are wanting to get as close to the complexity of real life which isn't the point of games.
Exactly. While there was little doubt Crysis is a fantastic looking game, and to a certain extent provides a realistic (for lack of a better word) environment, games like Team Fortress 2 and Battlefield Heroes are just more fun to play.

I dunno, it all sounds very exciting to me!
Now look what you've done. Gone and recreated next-gen game technology in a web browser. Just don't forget to update the image every once in a while, so we can see it growing.

games are supposed to be 'interactive'.
Spreadsheets are interactive. Games are supposed to be fun (or in the very least, competitive).