What I've found with the GameCube version (the one my grandsons and I play together) is that the littlest ones needed help getting started in the game (there's a mandatory tutorial that involves reading and following instructions), but after that, the kids can just go into "sandbox" mode and do pretty much what they want. My 4 1/2-year-old grandson just ignores the reading parts and wanders around town doing whatever he wants. Pre-schoolers aren't really interested in the goals of the game; they just want to have fun with it. It's a great sandbox kind of game. He often does things that are counter to what you and I would do (picking and eating all the fruit or digging holes everywhere, for example), but it's great fun for him.

You don't
need to read anything to catch bugs, fish, pick fruit and weeds, dig up fossils and treasure, and many other things. I find that the game encourages self-guided exploration and development of fine motor skills in the hands. Many "transactions" can be completed without actually reading the conversations between characters, once the child knows what the various controls do (accept, cancel, etc.). The reading will eventually come into play as the child begins to take an interest in the story and conversations.
Of course, the Wii version will feature a completely different control system, and I'll report on that when I've had a chance to play it.