No, the HJ did not drain off funds that might have gone to a V8. The lead engineers on the project left Kaiser-Frazer to make more money at Nash Motors (who wanted them for their V-8 R&D know-how for a Nash ohy 8 cylinder car). While at Nash they discovered that the K-F work needed more than tweeking before it could be a viable product. In fact, it took the two men from 1950 until 1955 to finally come up with a workable V-8 engine reliable enough for production. This engine was the 290 cubic in "Typhoon" which evolved to the well known (by AMC standards) 327 V-8.
If you read my book BUILT TO BETTER THE BEST, you get a walk through the RFC loan agreement whereby government money (the RFC was a Depression era hold-over that continued loaning money until after the 1952 elections) in the amount of 44 million dollars (the loan was in two parts, one to Kaiser-Frazer Corporation and the other to Kaiser-Frazer Sales Corporation) which made the difference between getting out 1951 model year cars and filing a Chapter 11 bankruptcy petition. The main thrust of the loan presentation by K-F was that with new capital they could put into production a car that any working American family could afford to buy new. To guarantee that Kaiser-Frazer made good on the promise the loan agreement contains several conditions specific to this low-priced car (read the book for particulars) including price, availability date, highway performance, and interior room. It was the first time the government ever spec'd out a civilian automobile (and would not be the last). The company met all the government's conditions and prevented forclosure in the fall of 1950. The government didn't care about V-8 engines but did care about a decent car that working people could afford to buy and own (as did many of the country's major unions who lobbied heavily for K-F to get the cash).
My book is still in print and can be ordered at its original 2005 retail price of $44.95 plus shipping from MT Publishing, Evansville Indiana. Check out their website for more info on ordering.
As for giving up on the Henry J, sales went from around 80,000 cars (4 and 6 cyl models total) to less than 25,000 in 1952 (including 1952 Vagabonds) and even fewer in 1953 despite heavily promoting the fact it was the lowest-price 6 passenger American made car offered in 1953. What was doing gangbusters during 1952 and 1953 model years were the Aero Willys series sedans and hardtops from Willys-Overland (and a division of Kaiser-Frazer acquired the automotive operations of Willys-Overland in the spring of 1953, weeks before the Korean War truce & everything at Willow Run unraveled). The first thought was to drop the HJ and sell the Aeros.