go the thai way.
plonk in a 2jz.
if it is done nice and neat, with the right performance tweaks, no reason why it will not be great. tak payah banyak banyak - 500bhp cukuplah! in a 2jz - senang senang dapat.
or maybe an rb26?
great project to do but make sure the mechanic doing the job knows his stuff and bmws because he'll have to marry the two together or there will be reliability issues later.
best of luck to your friend.
as for jpj registration, keep the old engine and transmission. next time if you intend to sell the car they will insist that it be put back to original condition. mind you, no way you can transfer ownership of the car today with a toyota engine.
unless of course your friend can be sure he won't be selling this car ever.
alternatively, some dude in australia and the uk fitted a bmw v8 540i engine into the e36 - nice.