Hey, I want to believe I know a thing or two after doing RTAs of different categories for this game for a bit over a year so I'll try to shed some light on some stuff.
First, this a very interesting TAS I had not seen before during my nico adventures so thank you for sharing it.
Level grinding is a vital part in increasing your damage and your survivability. Basically, reaching certain stat and level breakpoints will give you additional hits (more damage), as well as additional evasion chances (more mitigation).
For this TAS though, after looking at the endgame, obviously the goal is: for the Onion Knight to have enough HP to survive the final attacks (since he's gonna have lousy stats anyway at level 25), and for the W.Wizards to have enough MP to cast off all the needed Hastes and Protects.
Still I agree, the early game grinding looks unnecesary, considering there's more efficient grinding spots later on, and that you can get through the early game with much less than this TAS does (2 SouthWinds on Jinn, manipulate BombShards from Leprechaun to use on BigRat, Medusa+Guzco+Salamander can be done with just one/two lv9 Fighters, use damage items on Hyne, farm BombR.Arms from Water Cave Ropers to use on Kraken, use the Bacchus'Wine on Goldor), and then the good grinding areas open up. But then again, this TAS is from 2008 so yeah, strats were probably just vastly different back then.
The RNG in this game works a bit differently: in combat, RNG only changes on action, its not frame-based, so unfortunately you just can't wait some frames and/or use different inputs to manipulate 100% crits for you and 100% misses for the enemy. Also, due to this, sometimes misses could just be a way to get a more favorable RNG later on, such as getting the enemy to use (or not) a specific skill, or just manipulating a more favorable damage roll. I agree it doesn't look pretty, and -ideally- you'd rather just get a more favorable starting RNG state (which IS frame-based, thus it CAN be manipulated by waiting as well as using different inputs before triggering the encounter).
He farms Pyralis and D.Zombies from the Ancient Ruins because they're one of the best sources of EXP and they drop dead to a single Medusa Arrow (he also manipulates the formation index by walking against the water tiles, which increases the step counter AND the formation index when an encounter is supposed to happen, except said encounter never actually happens since you didn't actually take a step). And in the Crystal Tower, he does something similar kill 4 dragons for Onion Equipment, which as you can imagine is extremely overpowered.
I'm guessing you found Inari's run (a 3:52 if I recall correctly).
Killing off one character just helps you level up the other three faster so they can reach specific level breakpoints quicker. Its fairly useful for RTAs but in a TAS where you can just manipulate everything its probably not the optimal choice.
Hope this helps, best of luck.