That's what I was thinking, I watched it the other night and again tonight.

'I wasn't talking about what happened in the real case or book, I wondered about this kind of situation in general - what would the feds do? It's both a legal and moral dilemma.'
They just hope the guy never finds out that he was beaten up by an undercover agent.
It's that man again!!

They would probably find a way to avoid the situation. Agents are fairly good at that (not getting caught in that position).
That said, if its him or me, its going to be him. Doubtful they pay the guy a dime. He could have walked away from it just as easily.

I wasn't talking about what happened in the real case or book, I wondered about this kind of situation in general - what would the feds do? It's both a legal and moral dilemma.

No this never happened. At all.
What did happen (if I remember correctly form the book) was that a variation of this happened to the strip club owners that sold the fugazy to Lefty in the beginning. The guy had a deal with Tony Mirra (who the movie did not include) and Mirra got a fake diamond. He was going to knife the guy. Donnie said to let him handle it and he beat the beep out of him. But it was to prevent him from getting killed by Mirra.
The movie used this to build up the "close call" stuff and the "him or me" for Pistone as an undercover agent.

I wonder, if this happened IRL, would the japanese guy get a compensation from the FBI for this? It would be pretty scary if he didn't, however, if they do, then they risk compromising the entire operation since that would mean another person (a civilian no less) knowing their secret.

I believe this never happened & was just added to the movie.

His excuse was that his father died in Japan, leaving him an orphan. To mob guys, family is everything so that was all the excuse they needed. Remember, this took place in the 70s and there was still some hostility towards Japanese for attacking Pearl Harbor. Think about it, their own fathers were probably in the war as well.

I wonder if that really happened. You'd think they would be as suspicious as hell as to why he wouldn't remove his shoes, after all. But nobody questions him on this.
I thought the later scene where he was recognised
by an acquaintance at the airport, was handled beautifully thoughvery quick thinking!

I'm sure Mr. Moto would have also insisted Donnie take off his boots prior to visiting the restroom.
"He killed sixteen Czechoslovakians. Guy was an interior decorator."

The mob is always on the lookout for a rat in their midst. Excusing himself to a restroom would have just drawn some suspicion on him, and he knew that.

Most restrooms don't have windows. Also, the beating of the Jap guy was an attractive scene.