Xenoblade has always sacrificed character detail for world detail. The characters in the first game looked like refugees from the Dreamcast.

Besides, I don't think they're that bad. 

Gonna to need more than a palette change to convince me that there's actual improvements going on ...

i also notice character detail frequently gets sacrificed for environmental detail in japanese games (nintendo being an exception, since they're all about their characters). even platinum didn't seem to care too much for w101 character models. i think xenoblade is the perfect example of the world trumping the characters.

How about whole new mountains? 

as they should? This is standard for most games. You know, they got time to work on improvements from the past build. I don't see how this is a big thing. It's a shame that character models take a hit. The models looks late PS2 to early PS3/360. Given how big the game is suppose to be, I guess it was inevitable.

It's only a big thing because so many games these days go the opposite way and look worse as time goes on.

No Watch Dogs is like the best example of a game that was massively downgraded. The only version that looks like the first trailer is the PC version, and that is after modders had to unlock the hidden graphical features. 

it was sarcasm 

Ah, you got me with that one then. :D

I don't see much of a difference at all. Both look equally good.