I'm guessing he is the actual real villager, because it seems to me that someone who is an expert at this game and also has the power to back it up, wouldn't be such a coward - and what do we know about the original villager's personality? He's a coward.
So I guess the villager just somehow absorbed the memories and skills of an otherworlder, and those strong memories (particularly of seeing his own world as a game) have left him confused about who he actually is.
Essentially he's just in heavy denial from the existential crises brought about by seeing your world is just a game.