Oh, neat, someone else familiar with the game.  I don't have The Colors of the Sky, although I should pick it up at some point.  I do have Twilight Tales, so other youkai may turn up from time to time, though possibly not as player characters.  

Anyway, I'll have to think a bit on what to do for the setting overall. Last time I considered small town America, my thoughts went toward looking at American folklore and such for ideas.  So it'd probably be a mix of Native American stories and other such things, if one wanted to draw directly from them instead of the more Japanese sort.