I actually thought that as far as Japanese games with religious content go, Xenogears was on the more lenient, balanced end of the spectrum. Many if not most JRPGs that present religion and divinity (Breath of Fire III, Grandia II, Tales of Destiny II, Takahashi's own Xenoblade...) have gods that are petty, flawed, controlling and ultimately antagonistic, and religions that are usually part of some nefarious scheme or another. Xenogears, on the other hand, contrasts its sham religion (the Ethos) with one that venerates a very real god and pretty much embodies all of the virtues that real religions preach (the Nisan sect). And though it has you kill a false god (Deus), it also has one that is shown to be both entirely real and entirely benevolent (the Wave Existence). The message of most JRPGs in regards to religion is "gods and religion are bad, and mankind doesn't need them", but Xenogears's is more like "religion isn't inherently bad, but venerating false gods and false religions can lead to catastrophe". Which is... pretty consistent with the teachings of most major religions out there.
Of course I'm not devoutly religious myself, so this is just an outsider's perspective, but I think if I were, Xenogears would be one of the few Japanese games that deals with religion that I'd actually be okay with. I think people just saw phrases like "kill God" and all the Judeo-Christian terminology and assumed it was much more blasphemous than it actually wound up being.