The impression I've been getting is that the thing literally cannot adapt, cannot change. You're still thinking about these demons as though they were humans or youkai, but that, from what I've been seeing, is quite inaccurate. I realize it may seem impossible to you that a thinking being would be incapable of change, but this is fiction, not reality. All the magic and stuff is impossible, but you have no problem accepting all that as part of the context; surely you could accept a seemingly impossible mental state as part of the context, too.
Also, Hanzo's right; we're simply going along with Kiku destroying the demon, and doing so very reluctantly (and after exhausting any other options we could think of). And given Kiku's thoughts on the seal plan, I'm pretty sure she'll kill the thing even if we do seal its power. As I've been saying, Purvis, the demon is going to die, whether you (or Byakuren) like it or not.
Also also, you've still got this attitude of your interpretation of Byakuren being the 'correct' one, but character interpretations are, in large part, a matter of opinion. In most works of fiction, characters are more clearly defined, but in Touhou, characterization is deliberately kept loose precicely to allow room for different interpretations (also, this is AU, so there's even more room). Your interpretation of Byakuren, for instance, takes the Buddhist thing much farther than any other I've seen (most barely even mention it, if even that). There's nothing wrong with doing that, as long as you, a: don't expect everyone to agree with that interpretation, and b: don't take the attitude that people who disagree with your interpretation are somehow wrong.