Otogizoushi is a story in two parts. The first half of the story takes place in Heian era Japan, and the second half in modern day Japan. The main character in the story is a young girl named Minamoto no Hikaru. Her family is involved in the doings of the Court, and the Court requests that her brother Raikou take on a mission for them. Because her brother is ill, Hikaru takes his place on a quest to save the Capital and the country.
Hikaru, posing as Raikou, is joined on her quest by a number of companions, including a loyal retainer named Tsuna, a warrior named Sadamitsu, an onmyouji named Urabe, and a young boy named Kintaro. Their quests involve collecting five Magatamas, glowing stone/gems in the shape of curved teardrops. These Magatama represent the five elements (metal, earth, water fire, wood), and used correctly they will save the Capital and the country, which is increasingly in the throes of drought and starvation. The Magatamas are scattered in different places among different enemies, so recovering each one is a small quest in itself.
During her missions, Hikaru’s brother Raikou dies. Once again at home, she mourns him by playing her flute, and attracts the attention of a court dancer named Mansairaku. During the story, Mansairaku comes to care for her and Hikaru falls in love with him.
When all the Magatamas are collected, Hikaru-tachi learn from Urabe that Abe no Seimei, the great court onmyouji, is planning to use the Magatama to destroy the Capital and country, not save it. Urabe dies bringing them this information, and the companions set out to stop Abe no Seimei. They discover they must first battle their way to where he is casting the spell.
Hikaru manages to get to him and confront him, only to find out that he is none other than Mainsairaku, the man she loves. No matter what she says to him, he will not stop his spell, believing that the Capital must be destroyed. Hikaru cannot bring herself to kill him, so when he completes the spell, she begins playing her flute and walks into the center of the spell. Mansairaku embraces her, she drops the flute and it breaks the Magatama of fire, ending the spell. Hikaru and Mansairaku are engulfed in the spell’s remains and disappear. Only Sadamitsu and Kintaro survive the battles and destruction.
The second half of the story finds Hikaru as a high-school girl who happens to also be the landlady of an apartment building. She wears the broken piece of the magatama on a necklace around her neck as a family heirloom, of course not knowing what it is. Her companions from the Heian era are reincarnated also as boarders and friends in this age. Hikaru’s brother, Raikou, has been missing for a year and she begins to start looking for him, with her all friends adding their various talents to help her.
Weird occurrences begin happening around her and a mysterious man, who is Mansairaku, shows up and alternately leads her into trouble and gets her out of trouble. Hikaru doesn’t recognize him, but occasionally feels like she knows him. Mansairaku apparently has lived all those years since the broken spell, waiting for Hikaru to be reborn so that they can together make right the balance that was messed up by the broken Magatama, and prevent the unbalanced forces from once again destroying Tokyo. Hikaru and her friends, with Mansairaku’s help, manage to fix everything, Raikou comes home and Mansairaku finally is able to end his life and disappears.