After I opened an issue on the git-for-windows bug tracker (https://github.com/git-for-windows/git/issues/2803), I found that my issue had already been filed as https://github.com/git-for-windows/git/issues/2777. That issue suggested that I need to set another git flag:
git config core.protectNTFS false
This (#2777) indeed contains a bypass for the my problem. I hope the git or git-for-windows (who were very responsive) come up with a better warning message, or even a true fix like a filepath mapping scheme.
Note that this is only an issue when using sparse-checkout with windows.