I don't think that the average Japanese programmer is any worse than the average American or European programmer. They are all really bad. For important stuff like this, you need to find the above-average programmers. I know plenty of Japanese programmers that are above-average, so lack of supply is not the problem.
The problem with the Wii could come down to a number of things. Perhaps the best programmers don't want to work inside a huge Japanese company. (That is not the best place for creativity, and I doubt Nintendo is especially innovative in this respect.) Perhaps this lack of extensibility was a design feature -- less stuff running at one time means less bugs (and less testing), and less demand on the hardware. Both of those things make the system cheaper, which is what its target market wants. (Remember that Nintendo makes money on each Wii sold, where that was not necessarily the case for the Xbox 360.)
A big part of the software development (like sdks and so on) of nintendo is farmed out to Intelligent Systems that is a not so big company in Kyoto (a bit over an 100 person) and the working environment is quite nice according to a friend I had there so I don't think that it's a problem of not being an attractive place to work.
Instead of it being a design feature, I think it's more a problem of not having anyone with the required knowledge to make good decision at the top. That said, nintendo as at least a few times listened and promoted people who were at the bottom of the corporate ladder like Yokoi Gunpei so Nintendo might be more flexible than typical japanese companies (like panasonic or sharp...)
As for the level of japanese programmers:
I have worked in european companies and in japanese companies and there is no comparison between the japanese programmers there and the european programmers I met in the european companies. The Japanese programmers were much worse... In a company I worked in (a big company that is also well known outside of japan) my coworkers who were developing software didn't know what object oriented programming was. Their java code was basically C code made in java with static methods everywhere...
Now I've only worked in two companies in japan and worked with altogether about 40 programmers and so maybe it's just me being unlucky but the level really was appalling.
I have no idea if the average Japanese programmer is any worse than a European or American one; what I can say with some certainty is that the average European game programmer is quite a bit better than the average programmer. Probably because game programming pay in Europe is terrible compared to "normal" programming. (you're talking by a factor of 2-4) So European game programmers are in it for the love of doing it. Maybe that difference isn't there in Japan?
What I can also attest to from first-hand experience is that the Wii SDK stack is/was riddled with problems on pretty much every level. I don't know enough about other consoles to say how different this situation is, but it certainly strikes me as out of date.
The salary is actually not that bad in game companies in japan at least from friends who worked in some. Working hours are tough though (a lot of my friends there used to finish at 9-10pm almost everyday) and overtime is usually unpaid (but that's the case for a lot of small companies in japan even though it's illegal and it's not as bad as, for example, architecture companies...)
I guess you probably have the unpaid overtime issue in gamedev everywhere. You're technically not allowed to make someone work more than 48 hrs/week in the EU but I routinely worked 60-70 for weeks to months. (I guess not forced, but you know, the usual persuasion tactics)
My impression is that there's more of a workaholic ethic in Japan though; the programmers I worked with grudgingly put up with it but went straight back to 40 hours given the chance, whereas the guys in Japan seemed to work all hours regardless. No idea whether that extends to programmers.
In japan, there is a strong pressure to not be the first one to leave the office (especially in small companies). Being a workaholic is considered good and being the one who works the longest carry a certain aura of prestige.... So the manager doesn't even really try to persuade you it's the environment around you, when it's officially time to leave for the day and every one around you continues working, it's hard to go back home and you even end up using an excuse like if it was somehow wrong to respect you working hours.
Another thing, if you finish normally at 6pm, if the company organizes a dinner between coworker at an izakaya (a kind of pub), they usually plan to go around 8pm since everyone will still be working or busy at 6pm anyway...
On the flip side, a lot of smaller companies have rest areas and it's not really looked down (at least for programmers) to go and read the newspaper or a manga during working hours to decompress from a problem.
I don't really know anything about the games industry, but I worked in Japan as a web programmer for about a year. The other programmers were pretty bad, probably the worst I've ever worked with. I also got the impression that programming was viewed as kind of a lower class job, something weirdos and foreigners did. Somehow I got lucky and was paid pretty well, but the local guys were making horrible salaries.
The problem with the Wii could come down to a number of things. Perhaps the best programmers don't want to work inside a huge Japanese company. (That is not the best place for creativity, and I doubt Nintendo is especially innovative in this respect.) Perhaps this lack of extensibility was a design feature -- less stuff running at one time means less bugs (and less testing), and less demand on the hardware. Both of those things make the system cheaper, which is what its target market wants. (Remember that Nintendo makes money on each Wii sold, where that was not necessarily the case for the Xbox 360.)