is touhou's setting as a whole a dystopia?

Not any worse than our world. Probably a lot better in many ways. The evidence suggests that Gensokyo really is the best po outcome for humans and youkai in a world where youkai still exist. If you think about it youkai were really given a bad deal: They can't exist without fear but if they do too many genuinely frightening things they threaten to source of fear itself. The current set up where youkai need to keep humans in the afraid and weak is a reflection of a unfortunate reality more than genuine malice on the part of the youkai.

Even given these circumstances youkai seem to be pretty bad at maintaining their scariness. Most, if not all their claims of ill toward people is bluster. Taking that and the general tone of touhou into consideration, it's hard to call it a true dystopia. More like a pretend dystopia run by dorks who would rather be doing something else.

/r/touhou Thread