That's an interesting argument, I do see what you're saying. I'd counter that since someone of any race can be a Jew by this definition, it doesn't exclude on the basis of race.
The intent is also quite clearly to establish the country as a religious nation, and while I'm quite glad to live in a secular nation (the US) I don't begrudge religious nations their right to exist (eg; islamic ones).
(disclaimer, I am a secular Jew)