For a while on these forums, I avoided the use of the term "genocide" for these exact reasons, and would say "mass-murder" or "exterminate" instead. Because I agree with you - using it about something that happened in a video game is dumb and honestly pretty tasteless. I'd even go further and say that it's probably inappropriate to use even when talking about more grounded events in the setting, because even when it's playing with more serious themes, this is - again - a game for teenagers. It's a cartoon and doesn't ever merit truly serious language, and you can't really pick and choose based on what vibes right to you. (Like I've said in the past, I don't see the distinction you make between what happens to the Ancients feeling like allegorical mythology versus something like Sil'Dih; if anything, the stuff with the Ancients feels less like mythology since we actually went to Elpis and got to know them - but that's just to illustrate that this is often a matter of opinion.)
But it's another horse has bolted situation. After a while, I noticed the word had become so normalized in talking about the Rejoinings and about Garlemald that it just felt awkward not to use it. Like, if we've already escalated to that degree, all not saying it accomplishes is to make it seem like you're trying to asymmetrically soften how something which happened in the game's plot came across to you. At that point, your choice is to either disengage, or to escalate yourself.
I think a lot of this discourse becomes self-perpetuating. Group A feels grossed out by message the game seems to trying to send with the Ancients, and expresses that how they were exterminated felt wrong. Group B responds defensively by saying it was for the best and insinuating they're supporting something even worse in-universe. Group A gets defensive itself and is drawn into the diagetic argument, where the two made-up factions are compared in increasingly hostile terms. Emet is like a real-world fascist. Venat was doing eugenics. Once the argument has become "exactly how bad were the crimes of these fictional groups", rather than looking at Endwalker and Shadowbringers as pieces of writing, it's inevitable that we'll start talking about the story more and more like it's real life, until the conversation is distorted into something really stupid and completely divorced from what anyone actually cares about.