Wonders, Mysteries, Magic, Fantasy. They are things that the humans in the outside world have either denied or forgotten. Gensoukyo is a world that consists of those things.

The youkai that lost their power because the outside world chased them here, tried to regain it by planting fear into the humans here. But the humans, with the help of the Demon Exterminators, drove them away. There's no contradiction in that composition.