Moved posts to the discussion thread.
A lot of the information in the info thread (mainly the backstory/scenario/game structure) is out of date and needs to be adjusted accordingly. I'll try to answer your questions, but keep in mind there aren't really straight answer for many of them so I apologize if I've glossed over certain points.
Ijiyatsu takes place in a world that isn't Gensokyo, and isn't the real world. The exact associations and metaphysical ramifications of this world in comparison to Gensokyo and it's characters are intentionally left vague. Ijiyatsu's content and characters is influenced by both the Touhou world and it's fandom community. Basically, it's a parody of shmups and Touhou framed around a storyline and characters *loosely* based on some of it's fans and their activities in the 'real world' (i.e. the forums). It started as a joke concept, that snowballed into something people had genuine interest in, and was picked up by a few of those members that have been (and still are) working to make the game a reality.
This post also may give you more insight over this project and it's significance to the board.