Speaking to Game Informer, Sony Worldwide Studios boss Shuhei Yoshida said that the firm "dropped the ball" with its handling of the From Software title.
"Luckily, third party publishers, Atlus in North America and Namco in Europe [stepped in], and it really became a great hit outside of Japan. We definitely dropped the ball from a publishing standpoint, including studio management side," he said. "We were not able to see the value of the product we were making.
"I hope we won't make the same mistake again. I should have been more stubborn talking to marketing people here in North America and Europe."
Yoshida went on to say that his initial impressions of Demon's Souls were negative because the build he was shown had frame rate issues, and saw him remain at the beginning of the game despite two hours' playtime.
"For my personal experience with Demon's Souls, when it was close to final I spent close to two hours playing it and after two hours I was still standing at the beginning at the game," he admitted. "I said, 'This is crap. This is an unbelievably bad game'. So I put it aside."
The studio head attributed the oversight to the "horizontal" approach to game development in Japan, "where all assets are made in parallel", which he claims makes it difficult to predict a product's final state.
Demon's Souls was released for PlayStation 3 in 2010. Its sequel, Dark Souls, appeared on Xbox 360 and PS3 last year.
Watch a trailer for Demon's Souls below: