The fact that this tiny engine couldn't meet emissions standards is bonkers. But that's the law as written right now.

Of course it could. But the whole reason for Kei cars being cheap in Japan is that they are light, power-limited and exempt from some emissions and safety regulations. The emissions part made sense ages ago in Japan when emissions was more closely correlated to engine size. Now they are too popular domestically and as an export item for the regulations to be changed easily. It’s a matter of time though.