Supposedly that effect creates an optical illusion of sorts that makes the things on screen look more like real, miniature objects/toys.
It's too bad you need the blur for it to work, but I think it does the job and the game has a really interesting/charming look and feel partly because of it.
Tilt Shift Photography for Spectacular Miniature Effect
In photos it works great. I don't think they quite got the right look using it in game.