It's a genjutsu all right, but there are different sorts of genjutsu. Not all of them have to be ones where your mind is trapped in an illusion. As far as we're told, Mizukage summons a clam which churns out mist across a large, battlefield sized area. The Mizukage can then use this mist to create a series of "mirages", where he alters the perceptions of his victims. This primarily consists of creating illusions of himself, which are not real, and hiding his location. Good things about his illusions:
- The area they cover is huge. Big enough to hide effortlessly from the better part of a division of shinobi who are searching for you (and who specialise in long range attacks, since it was the 4th Division), and with every division consisting of thousands of shinobi that's not a trivial thing. Half the 4th Division had split off by this point, but we're still talking about a number in the thousands. During the genjutsu we see troops in the distance on mountain like rock pillars who are unable to find him, and thus within the range of the genjutsu. When the genjutsu is broken, we see a the cloud of smoke in the distance, behind several rock pillars, so it doesn't even seem like he needs line of sight for the genjutsu to work. This makes it probably the 2nd most long range genjutsu we've seen, behind Itachi of course.
- It's apparently so confusing, thousands of shinobi looking for him can't find him, even with him giving them clues, and telling them about the genjutsu and how to end it.
- The Genjutsu does not require the victims to see or hear something for it to work. It just affects everyone in the (very large) area of effect.
- The Genjutsu cannot be seen through by sensor Shinobi
- The Genjutsu does not appear to require any significant effort, and can be kept up for a lengthy period of time
- The Mizukage is somehow able to kill large numbers of enemies trapped in the genjutsu, despite being nowhere near their position. It is unclear if they die because the genjutsu makes them believe he's attacked them, whether the Mizukage can somehow attack them remotely, or he makes the victims attack each other (when they think they're attacking him). It's probably at least partially long distance attacks, because the Mizukage was nowhere near Gaara and had no line of sight, yet was able to use his oily water to stop his sand (and after the genjutsu vanished, the damage caused by the water remained). However there is no sign of the Mizukage needing to attack his earlier foes in order to damage them.
- The Clam seems able to move position, as it plainly wasn't in the original place he used it, though it's not clear if he moves the clam somehow (using water?), or the clam just moves on its own.
The downside is that he can be physically located by sensor sand, and assumedly seen through by the sharingan, as the ability to see different chakra colours should enable them to see through the genjutsu (just like the sharingan seems to allow the user to get out of pretty much any genjutsu/see through any trick that others cannot).