After a not-very-peaceful journey through Peaceful Rest Valley, you arrive in Happy-Happy Village.
Avoid the Yellow Lady
In the village, avoid the yellow lady to the left of the fence entrance. If you get too close, she will demand that you buy a postcard, and if you refuse, she will follow you around.
Prepare to Rescue Paula
There are Insane Cultists wandering around the village who will attack you if you come near. They can call other cultists into battle, so you can get a lot of EXP by allowing more and more cultists to be called into battle.
Upgrade your weapons and equipment in the Drug Store. You can also buy (or steal) eggs and bananas from the self-service shop. If you do steal, don't talk to the Unassuming Local Guy behind the tree, or he will attack you. You can make a lot of money by stealing eggs, waiting for them to hatch and grow into chickens, then selling the chickens.
Get the Franklin Badge from Paula
Go into the cave to the left of the drug store. At the other end, you find the cabin that you saw earlier in Peaceful Rest Valley. Go inside to find Paula. Talk to her through the bars. She gives you the Franklin Badge. Without this badge, you can't defeat Mr. Carpainter, so be sure to keep it in your inventory. You will need to get the key from Mr. Carpainter before you can rescue Paula.
When you leave the cabin, Pokey taunts you, then sends crows and cultists to attack you before he runs away. Defeat them and return to Happy-Happy Village.
Go into the Happy-Happy Headquarters
When you are ready, go into the big house in the center of Happy-Happy Village. There are many cultists standing around, chanting. It will seem like your path is blocked, but look for cultists who are moving more quickly. Talk to them to make them move. Some of them will fight you before they move.
The gift box in the bottom-right corner of the room contains a Croissant. It will be easier to get this item if you come back after defeating Carpainter.
Talk to the fast cultist who is southwest of the entrance. After he moves, go west and talk to the first fast cultist that you see. Then talk to the one behind him. After they move, you can go north to get a Skip Sandwich. Go southwest from the gift box and talk to the fast cultists there. Now you can go all the way to the left side of the room. Ignore the cultists who are walking in a circle, because they will attack you if you talk to them. Go to the left side of the room and go through the door there.
In the next room, go up the stairs to reach Mr. Carpainter. You can see the Evil Mani-Mani statue behind him. You might have seen this earlier if you visited Lier X. Agerate after taking Picky back home. The Evil Mani-Mani statue has affected Mr. Carpainter's mind, causing him to start the Happy-Happy cult, and giving him psychic powers.
Talk to Mr. Carpainter and refuse to join him, and he will make lightning hit you. However, if you visited Paula and put the Franklin Badge in your inventory, the lightning will be deflected, and Mr. Carpainter will fight you.
Use PSI attacks on Carpainter unless he casts a psychic shield. Try using Paralysis on him, because there is a 50% chance of success.
After you defeat Carpainter, he gives you the key to Paula's jail cell. Go outside and Pokey will talk to you before running away.
Go to the cabin and use the key to unlock Paula's cell. She joins you and has a Teddy Bear with her. If you have any old equipment or armor, you can equip it on Paula. She starts at level 1, so she will die in battle if you are not careful. Go back to Happy-Happy Village and buy new equipment for Paula, but not the Holmes Hat. Get the Ribbon for her instead.
You can sleep for free in the hotel now that the Happy-Happy cult has been stopped.
Optional: Lilliput Steps
The cave east of Happy-Happy Village leads to the "next" Your Sanctuary location, but since Paula's level is low right now, you might want to wait until later to go there. If you want to go there, read the Lilliput Steps page for more details.
When you are ready, go back to Twoson.