Very late to this but Nightmare is what is name suggest. It is for player skills and not character skills or the abuse of abilities. The attacks are usually time baseds and the enemy has pattern, you have to perfectly memorize those to be able to survive long enough to deliver enough damage. This is all and it is true for all Ys games. In a story playthrough you can easily overlevel enemies because as it was said even a single level matter. There is a minimum level cap for resistance and piercing, above a certain level you become more resistant against attacks below your level and your damage do extra damage to armor (easier to break through boss defenses to deliver actual damage). Ys was never meant to be played like that, it is just for fun anyway.
If Nightmare is supposed to be about player skills rather than character skills, then why does one level matter so much? I don't mind having to learn the attack patterns of bosses (particularly if I've chosen to play on a higher difficulty level), but what I do mind is having to reach a certain level to have even a small chance of winning in a reasonable amount of time, and I also mind the possibility of breaking the game too much by over-leveling. (As I mentioned, in Oath in Felghana, by doing things a bit out of order, I can easily get enough XP to trivialize two of the bosses.)
That one part in Ys Origin that I mentioned, which is not a boss fight (contrary to what some people think, boss fights are *not* the entirety of the game), is bad game design because of how much waiting around you have to do. You aren't dodging enemy attacks during that time (in fact, it's actually better to come in at low health, because then boost refills faster), you are just waiting until you can continue with that task. It's a shame because there's a later part of the game, namely that one place with the nasty music where you're constantly losing health and have to use Boost and the thunder attack that heals you to stay alive in that area. (That brings up another point; I don't like the fact that the healing effect is disabled during boss fights (well, except for a couple cases that the developers overlooked).)
Also, the upgrades you get from the currency, while nice, are not even close to game-breaking, and I think that making them effectively unavailable on Nightmare mode is a lazy way of increasing difficulty by taking options away from the player.
I guess I just don't like the rules changing in arbitrary ways when there's a boss, and I found that one non-boss part to be poor game design.