Why didn't the Japanese stranger...? *Spoilers*

I think he and the crooked shaman need to keep the rumours about him going. It helps the racket they've got going, seeing as they need to entice people to sin somehow and exploiting people's fear is their best bet.

Maybe because it didn't really happen? Maybe because the guy knocked his head so bad ("look, I got 22 stitches") that he just dreamt up a bunch of nonsense, most of which is just a hodgepodge of stereotypical blood libel imagery? Maybe because the whole movie is really about a bunch of bored, provincial, bumpkin cops who allow a disease epidemic to degenerate into basically a witch-hunt against the nefarious "Jap" foreigner who lives outside town? The final image of the Japanese man -- from the point of view of a character after they've been infected by by this hallucinogenic plague, no less -- is so outrageously offensive that it's almost silly, what with him literally turning into a scaly, horned demon who kills you with a 35mm camera (like an EVIL '80s Japanese tourist!).

I really think all of this is more about how pogroms develop than it is literally about evil spirits.