DON'T READ THIS KATO:

I'm pretty certain he was fine but the life events sent him loopy & into this random alternative persona. The treatment they provided did work, shocked him back to reality, but once he remembered all this stuff & the reoccuring dreams he pretended to still be bonkers because he would rather recieve the labotomy than live life with those memories. Been a while since I watched it but after he said those last lines didn't he go with the Doctors without hesitation, 'surrendering' in a way? Shows he knew what was happening.