My guess is textured polygon "threads" animated in a way so that the depth remains relatively the same. That way, a turning character/object looks like it was animated to turn around.
Since the game is coming out this Sunday it won't be long 'till we figure it out.
A closer reveal in the Dolphin emulator reveals that the thread that consists the characters is either some sort of cleaver fur shading, meaning to say this isn't sprite based animation but vector based.