Well, if we're talking about black characters, then there is a reason why in Japanese games they tend to be more stereotypical than in Western games. There's hardly any black people over there, and since they don't have the same history with them as we do in the West, they have much less stigma about portraying them in a stereotypical way. I'm not saying that means that it's okay for them to do it, it's just the reason they do.
But on the topic of character designs in general, I think one of the reasons that Japanese design can go wrong is because often they are designed around their costume, rather than their actual physical appearance. Granted, Western design is guilty of this too to some extent, but in Japanese games they more often tend to design characters with perfect, flawless, and homogenised facial and general physical appearance, and then differentiate them with improbable hair styles and elaborate costumes. I think it's a trait that's bled over from anime and manga, since they tend to imitate that art style. This isn't always the case, but when bad Japanese character design exists, it's often for this reason.
Western games have a similar problem too. I think it's a more recent thing, because it hasn't had as strong an influence from other media like Japanese game have had. But more recently it's become common for characters to be the "everyman" archetype, so that players can relate to them and/or self-insert. So it's lead to an endless stream of dull, generic, 30-something, white men with short, brown hair. In a way they're even worse than their Japanese counterparts because this dull and non-specific style encompasses costume too. So many wear just jeans and a t-shirt, or a jacket or something. Or maybe generic, uncharacteristic space marine power armour.
One piece of character design I've been impressed with lately though is Raiden in Metal Gear Rising. His body has a lot of detail, and it looks very tangible and real. It has a hell of a lot of style to it, but it looks like it could actually exist too. You can actually imagine how it would feel to touch it.
Other favourites include things like the designs in Okami and Wind Waker. They're simple, but very expressive. I really like how they've managed to soak Okami in a traditional Japanese influence, yet still made characters that look very distinct. Zelda has always had some of the best designs for non-human races too. Really inventive stuff, but still looks natural and charming.
I also used to really like the look of the costumes in Assassin's Creed. Specifically, around the renaissance era stuff. Yeah, it got pretty flamboyant towards the end. So far that it was far from stealthy, but it looked gorgeous. All the little design details were so lovingly crafted, but it didn't look over-designed to me either. It was, after all, still the outfit of a rich nobleman of the renaissance. It still managed to keep true to the aesthetic as well. It could never be mistaken for anything other than Assassin's Creed. Ezio's face, on the other hand, wasn't that interesting. I suppose he had that scar, but not much else that was particularly distinct.
