How could the Youkai Mountain exist in Gensokyo over a thousand years ago? If it is THE Mt. Yatsugatake, then it shouldn't exist at that time, because: It was torn down in times predating the existence of Lunarians and Gensokyo's oldest layer of the barrier is only over 500 years old.
Furthermore, this is what the wiki says in the timeline: Iwanagahime furthermore, at around the time of 100 years ago, moved to Gensokyo's Youkai Mountain (once Yatsugatake)
It didn't necessarily exist in "Gensokyo" yet, it just existed in the area that later turned into Gensokyo. Aya didn't even settle down in the Gensokyo area until a bit later, however she does acknowledge that Yatsugatake did erupt back then. The Yatsugatake currently in Gensokyo would still be the "tall" Yatsugatake, despite Yatsugatake being cut before Gensokyo's sealing. The small Yatsugatake still exists in the real world, after all.
Iwanagahime moved to Yatsugatake from Fuji after Yatsugatake was shown to be higher than Fuji and Sakuyahime cut it down. The date is placed at 1707 because that was Fuji's last eruption, but I disagree with that assessment. First of all, I don't find it necessary that Fuji would have stopped erupting just as Iwanagahime left it; she was only the one
keeping the volcano eternally active, so it could have just taken a long time to calm down naturally. In the same way, Iwanagahime didn't create the volcano in Yatsugatake, she just moved there.
When Mokou attained immortality, Sakuyahime explained to Mokou that Yatsugatake would be a better place to dispose of the Hourai Elixir, because Iwanagahime was already there. This was ~1300 years ago. Simply from that, Iwanagahime must have moved to Yatsugatake before then; Sakuyahime says they had a fight "long ago".
However, Mokou seems to conclude that the smoke from the current Youkai Mountain is the same that she remembers coming from
Fuji before. Considering that during Mokou's mortal lifetime she was told that Iwanagahime was in Yatsugatake, Iwanagahime was clearly not in Fuji anymore, and Mokou not knowing that Yatsugatake used to be taller means that it would have been cut down long before she was born. The only way this makes any sense is if the smoke rose from Fuji despite Iwanagahime being gone, and the smoke only has to do with the volcano being active, which Fuji technically was until more recently. So that's how I see it.
This seems to be how I assess the sequence of events:
- Long ago Yatsugatake was taller than Fuji.
- Sakuyahime cuts Yatsugatake down because she lived in Fuji and wanted to live in the taller mountain.
- Iwanagahime moves to Yatsugatake after this. Fuji loses its eternal flame, but stays naturally active. Yatsugatake gains the eternal flame, and in reality gives birth to other complex volcanoes by erupting, crumbling, shifting and so forth.
- After a long time, Mokou is born and climbs Fuji. She meets Sakuyahime and steals the Hourai Elixir from Iwakasa.
- Yatsugatake's last known eruption from the viewpoint of the youkai, presumably referring to Mount Yoko's eruption.
- The Gensokyo area separating myth and reality is formed during the Youkai Expansion Project.
- Mokou, living near Fuji, has at some point become accustomed to its smoke, its last eruption being in 1707.
- Gensokyo is later sealed with the Great Hakurei Barrier.
- Iwanagahime moves to Gensokyo and Youkai Mountain, which becomes active once again.
The previous activity of Youkai Mountain can be either be eruptions from before it was cut down and disappeared into myth, or it could be that Gensokyo's Yatsugatake "transformed" into the mythological one somehow, yet still having scars of the real one's recent (i.e. Yoko) activity.