Ah, the Mother 3 battle system. It's hard to describe how I feel it will turn / would have turned out, but I'll try to do so comprehensibly.
The feelings I receive when I think about the battle system are rather simple. It is a direct, semi-logical progression from Mother 2's battle system.
However, there does appear to be the slightest discrepancy between the various reports I have seen. One states that hitting buttons at key moments during the battle music will effectively give a SMAAAAASH attack. The second indicates that you play a "3D stick" which I assume is the analogue stick like you would a guitar, and your damage depends on how the "song" you create.
(I use SMAAAAASH since I suspect it may be one of the few hold-overs from the Gyiyg arc of the Mother series.)
Of course, there may be a simple explanation for these discrepancies. The subcontexts in which the two disparate descriptions appear may have been the same or similar in their original, Japanese contexts, but were translated dissimilarly. However, this seems absurd and should be rejected.
Therefore, it seems that what happened is that, at some point X between the mentioning of the two descriptions, the Mother 3 team decided to switch the musical aspect of the battle system from one point to the other.
Having finished that segue, perhaps I should re-address what I expect the battle system will be like.
What Itoi said as Mother 3 plodded onto its undeserved cancellation suggests to me that when it was cancelled Mother 3 was effectively completed. That is, only the dialogue remained to be added. As a result, the battle system would have been fully implemented.
Now, here's how I believe the battle system was designed and implemented...
The Dengeki Nintendo 64 interview says that the analogue feel was carried over from EarthBound, and what we see of battles in the IGN trailer supports that. The battle system maintains both the funky backgrounds and the neither-hide-nor-hair-of-the-heroes first-person view which we remember from Mother 2.
IGN's trailer's battle scene is abbreviated, and only shows a Pigmask Sergeant being defeated. The animation is fluid and doesn't indicate any skipping throughout the battle scene.
That suggests that the battle didn't use a fancy dueling analogue stick, as one description suggested. However, it does not rule out the possibility of the timed hits (reminiscent of those in Super Mario RPG, set to the music as opposed to the animation) that were also mentioned.
Put simply, I think what happened was the musical-dueling part of the battle system was replaced withed the music-timing part.
Another aspect of the battle system concerned what I guess glosses onto the Megami Tensei [Revelations, Persona, etc.] series' Talk function, where you can somehow convince enemies not to fight you. Indeed, it is a Talk function.
The Dengeki Nintendo 64 interview gives the following quote:
"In addition, before entering into the battle, there is a new device. If you bump into an enemy, you won't immediately enter the fray, but will first have an exchange with the enemy, after which a battle will occur. [...] On the map, you can enjoy walking and fighting, and fun elements have been added. For example, even if it's a powerful enemy, if you travel along without problems, you can defeat this enemy without worry. Even if you are worried, you can cut through the exchange before you fight, I think. Of course, if you believe in yourself, you'll defeat whomever stands in your way. [...]"
The IGN trailer, however, did not show any aspect of this ability, primarily because its battle scene took place entirely within the battle. After when the discussion was going to place.
Now, this discussion part of the battle system sounds innovative, and may be an attempt to experiment on the typical pre-boss filibuster native to most RPG. It was also likely directly adapted from the Megami Tensei series.
And I mean adapted. It can't have been plagiarised, since if Revelations: The Demon Slayer [one of the Megami Tensei games] is any indication of how the Megami Tensei Talk functions work, Mother 3's Talk function would have the ability to end a battle before it had started.
But from what I can infer, it doesn't. "[Y]ou ... will first have an exchange with the enemy, after which a battle will occur. ... [I]f you travel along without problems, you can defeat [any] enemy without worry. Even if you are worried, you can cut through the exchange before you fight[.]"
The battle will occur. That's what's said, and I don't think there's any way around it. But why introduce this exchange aspect if there's no point to it?
Itoi also said that there would be a small amount of characters, I believe maxing out at 100, so that multiple characters' perspectives could be used to enlighten The Player of the personality of a character. Perhaps that's the point of the exchange system: character development. I wouldn't put it past the development team to have designed that.
Now, since I'm clearly rambling, I'll summarise and conclude:
The battle system develops directly from Mother 2's. Music factors in in that hits timed to the beat of the music are more powerful. The exchange system was designed for character development.