Now that Apple depreciated Keychain app (although it is still available), how do I transition from passwords in keychaing to passwords in password app on sequoia?
I think you should wait to see, because KM hasn't been updated for Sequoia and its new Passwords app yet. It might be possible when KM is updated to support new features in Sequoia.
The action has never really been intended to read passwords stored in the Keychain/Passwords in ways other than using the Keyboard Maestro action.
Also, there are different types of passwords, and most passwords you would be familiar with are “web passwords”, but the action reads/writes “generic application passwords”.
So there is no effective change - it did not read web passwords from Keychain and it doesn't read passwords web from Passwords. It reads only application passwords from Keychain.
As far as I am aware, Passwords is still storing its passwords (largely web passwords) in Keychain.