I've heard a few variations: that COLORED belts are an American innovation, and that KYU testing was not traditionally done. I would agree with Erik, that the main thing about promoting without testing is the size of the organization. O Sensei probably could do it (don't know if he did, I do know I've heard he promoted higher dans without tests, but I think that's pretty standard even in competition-prone America)---and probably did. Same for small, independant dojos. But larger organizations require more standardization to maintain the group's ideals (and prevent grumbling).
I like testing, but I think of a test in terms of a) getting to practice with great ukes prior to the test b) not really being high on my anxiety scale compared to say, starting someone's heart again c) a chance to show my seniors and my sensei I've learned and appreciate what they've tried to pound into my thick head d) a chance to show my juniors a bit of what we are all working towards e) a chance to show myself what it is I am getting, and where I need to focus my attention next.