After escaping from Edward's Prison and rescuing Kara, Lilly takes the three of you to Itory Village.
Get the Statue
Lilly tells you to play Lola's Melody, so do that. Afterward, the invisible houses of the village become visible. Then Lilly takes Kara east to her house. Go there and you will see your grandparents. Lilly says to come back to her house after you explore.
Go west and check on the leftmost pile of logs next to the southwest house. You find Red Jewel #8.
At the top of the hill to the northeast, there is a Dark Space. Go in and walk up to the statue of yourself to get the Psycho Dash ability. To use it, swing your weapon, then hold the attack button until you start to flash rapidly. Then when you let go of the button, you will charge forward.
Go back outside and go southeast from the door to the Dark Space. There is a slope there. Run toward the slope and keep pressing left to continue running. You end up in a graveyard. If you walk south from the graveyard, a voice calls to you. Go up and walk behind the middle grave to make the ghost of the Elder appear. Talk to him. He tells you of your mother Shira, who is the only child of your grandparents Bill and Lola. Shira is the one who made the barrier to protect the village, but your father could walk through it. Say yes to both of his questions. Then go down the ladder to the south and go into the cave. Go north to reach the rear wall. Hit the wall with your weapon slightly to the right of the center of the wall until you hear the wall make a sound. Use the Psycho Dash on that part of the wall to open a door. Go in. Check on the golden statue to get Incan Statue A.
Now go back to the village. If you talk to your grandmother, she tells you her prophecy that a child who wields the Dark Power will set out to save the world, and at that time, a huge comet will orbit Earth and a Dark Power will arise.
Talk to Lilly. If you have the Incan Statue A, Lilly speaks of the Moon Tribe, which is more of a shadow form than a tribe. She asks if you are ready to go. If you are, say yes. Lilly won't let Kara go, so Kara goes outside to talk to your grandmother.
You and Lilly leave town and go to the Moon Tribe Camp.