I like the idea, but one thing bothers me. I don't see why the functionality of the up/down and left/right when engaged can't be the same when in party vs out of party. In fact, I don't see why in party vs out of party has to be different at all. Just change In Party to this:

When in Passive mode Target mode is set to all

When Engaged in Combat Target mode is set to:
(Enter or the X button) Targets Near by Enemy attacking you or a Party member
(Left and Right Arrows Keys or D-pad) Target Enemies
(Up and Down Arrow Keys or D-pad) Target Party Members and Self

...and then use that regardless of whether or not you are in a party. Simple targeting is even more simple.