1) Why is it so necessary that u need the Unreal III Engine?
For all i know Unreal 2 is an Engine with more than decent capabilities. Why bother when you dont have any pixel shaders in Wii. Yeah you can always write your own and render the CPU to to become one GPU. But the already one size bigger(compared to GFX 68K range PC Graphics) polygons will be lesser in numbers too.
2) Wii never really depends on the cinematic graphics does it? So why do we need those Extra polygons which just adds visual value and brings down the overall gaming experience(Which is Wii's plus point)
3) If you need presence in Japan, try going that extra yard and scale down the particle effects and visual extravagenza from your engine and give it to Nintendo.