I think a capacitive method would be preferable for MEMS. Magnetism doesn't usually scale down as easily. (Perhaps something adapted from hard drive technology might work, though?)
For instance, I'd imagine attaching to the shaft a pair of conductive sector plates laid out like the blue bits of the BMW logo, with these plates at a small constant distance above similar sectors to which are attached capacitance meters. Or perhaps high-k dielectric sectors attached to the shaft, which pass between pairs of sensor plates. Or a broad, shallow, 1-turn screw thread attached to the shaft with the capacitance varying at a given point according to the changing distance to the sensor plate.
It really depends on the details of what is possible in your fabrication process, how fast and how accurately you need to measure, what you want to measure (position, velocity, acceleration, torque, etc.) and what constraints or freedoms the other parts of the design impose or allow.