The story begins in late 1960s Japan. A group of tanuki are threatened by a gigantic suburban development project called New Tama, in the Tama Hills on the outskirts of Tokyo. The development is cutting into their forest habitat and dividing their land. The story resumes in early 1990s Japan, during the early years of the Heisei era. With limited living space and food decreasing every year, the tanuki begin fighting among themselves for the diminishing resources, but at the urging of the matriarch Oroku (”Old Fireball”), they decide to unify to stop the development.
Several tanuki lead the resistance, including the aggressive chief Gonta, the old guru Seizaemon, the wise-woman Oroku, and the young and resourceful Shoukichi. Using their illusion skills (which they must re-learn after having forgotten them), they stage a number of diversions including industrial sabotage. These attacks injure and even kill people, frightening construction workers into quitting, but more workers immediately replace them. In desperation, the tanuki send out messengers to seek help from various legendary elders from other regions.
After several years, one of the messengers returns bringing a trio of elders from the distant island of Shikoku, where development is not a problem and the tanuki are still worshipped. In an effort at re-establishing respect for the supernatural, the group stages a massive ”ghost parade” to make the humans think the town is haunted. The strain of the massive illusion kills one of the elders, and the effort seems wasted when the owner of a nearby theme park takes credit for the parade, claiming it was a publicity stunt.
With this setback, the unity of the tanuki finally fails and they break up into smaller groups, each following a different strategy. One group led by Gonta takes the route of eco-terrorism, holding off workers until they are wiped out in a pitched battle with the police. Another group desperately attempts to gain media attention through television appearances to plead their case against the habitat’s destruction. One of the elders becomes senile and starts a Buddhist dancing cult among the tanuki who are unable to transform, eventually sailing away with them in a ship that takes them to their deaths, while the other elder investigates joining the human world as the last of the transforming kitsune (foxes) have already done.
When all else fails, in a last act of defiance, the remaining tanuki stage a grand illusion, temporarily transforming the urbanized land back into its pristine state to remind everyone of what has been lost. Finally, with their strength exhausted, the tanuki most trained in illusion follow the example of the kitsune: They blend into human society one by one, abandoning those who cannot transform. While the media appeal comes too late to stop the construction, the public responds sympathetically to the tanuki, pushing the developers to set aside some areas as parks. However, the parks are too small to accommodate all the non-transforming tanuki. Some try to survive there, dodging traffic to rummage through human scraps for food, while others disperse farther out to the countryside to compete with the tanuki who are already there.
In a touching coda, one day, Shoukichi, who also joined the human world, is coming home from work when he sees a non-transformed tanuki leaping into a gap in a wall. Shoukichi crawls into the gap and follows the path, which leads to a grassy clearing where some of his former companions are gathering. He joyfully transforms back into a tanuki to join them. In an emotional final scene, Shoukichi’s friend, Ponkichi addresses the viewer, asking humans to be more considerate of tanuki and other animals less endowed with transformation skills, and not to destroy their living space; as the view pulls out and away, their surroundings are revealed as a golf course within a suburban sprawl.