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Touhou is set in a land called Gensokyo. Gensokyo is home to a race of magical beings called yokai. The yokai are constantly acting up, and so it is up to Reimu and co to figure out what the yokai are up to and stopping them.
Long ago, the yokai were all over the Earth. Being magical beings, they needed humans to believe in them to survive, but since they were solitary creatures, they started to die off as humans became more technologically and scientifically advanced. The yokai of Gensokyo, which was one of the largest Yokai areas, sealed the area off from the rest of the world, trapping themselves and the humans that lived there within it forever. Cut off from the rest of the world and forced to rely on the yokai, the humans fully believe in them, causing the yokai to continue existing. Recently, the vampire Remilia Scarlet and her followers arrived at Gensokyo and tried to take it over. After the war, the spell card rules were put into place to prevent casualties. The spell card rules are what is used by everyone in Gensokyo.