On my ICE the code runs good, but I have change the port (I have used P 4)try to change port, the time delay is ok to see blink a led.
Your code delay is too complex, try this type if you want...;


delay:
mov r0,#255
mov r1,#255
mov r2,#7
y: djnz r0,y
djnz r1,y
djnz r2,y
ret