After Whisper fixes the seals around town and you defeat Slimamander, you should upgrade your watch at Timers & More.
Timers & More
You can find Timers & More in the east part of Blossom Heights, which is west of Uptown Springdale. There, you meet Mortimer Goodsight. He says you need a cog, a screw, and a spring. You can get the screw at the Bike Shop. The cog is in the Old Mansion, and the spring is at Wayfarer Manor.
Amazing Yo-kai Watch!
Before you go, you can use your lens to find a Yo-kai in the teddy bear on the couch.
Next, go south to the Bike Shop and talk to the Bike Seller out front. He gives you the Watch Screw.
Next, go to Wayfarer Manor, which is northwest of the Bike Shop. The Landlord will give you the Watch Spring.
After that, the Landlord will ask if you will manage Wayfarer Manor. If you agree, you'll activate StreetPass. Then you will be able to meet Yo-kai from StreetPass.
Then go north to find the Old Mansion. There are a bunch of Yo-kai going around inside. You can go through the doors that have open eyes on them.
From the place where you entered, there is an eye door in the upper-left. Go through it, then use the northern door in this hallway. From there, go to the upper-left and go through the door. Go up the ladder there, then go to the bottom-left of this area, and from there go up to the upper-left. The floor will break under you, giving you access to an area that you couldn't reach before.
In the corner of this room, you find the Old Mansion Key, and another item. Go outside using the bottom-left exit, and go to the left to find a treasure box. Then go south and check on the locked gate to unlock it. Then go back into the eastern entrance of the mansion and check on the locked door to open it.
Go through and talk to the Yo-kai in the middle of the room. It's Baku, who eats nightmares, but it's having a nightmare right now, so you wake it up. It thinks that you're a monster and attaks you, along with two Pandles.
After you defeat Baku, you get Baku's medal, and you also get the Watch Cog.
Find the Watch Parts!
Go up the ladder in this room to get an item.
Then go back to Timers & More, which is southeast of the Old Mansion. Mr. Goodsight wants you to go to the Hot Spring after it closes to get his missing undies. You say that you can't go out after dark, but Mr. Goodsight says Baku can help. It can make itself look like you, and it can also remove all your sleepiness. You go home and Baku removes your sleepiness, then pretends to be you so you can go out at night.
Lucky Undies Finale
Go outside. When you try to walk away, everything becomes foggy and an Oni appears. You have to try to go to the school without any Yo-kai catching you. When you get there, the mysterious Yo-kai boy who helped you defeat Slimamander appears and makes a door appear, then he vanishes. After you go through, everything goes back to normal.
Whisper explains that that was Terror Time, a type of nightmare that kids have. If you escape the Oni, you'll become stronger. If you get caught, you'll be OK, but you won't be any stronger. More small Oni will appear in the nightmare as time goes by, so you should try to find the exit quickly. There are also treasures hidden in Terror Time, but you have to find them quickly to avoid getting caught, because you can only keep the treasures if you don't get caught.
Go west from the school to reach Blossom Heights, then go south to find the Hot Springs. Inside, the girl says that there is nothing in the lost and found, but Whisper senses an aura nearby. Go into the door to the left of the Sauna Girl, then go back to the bath. Use the Lens to find Sproink in the bath. Talk to him. You see that he's wearing Mr. Goodsight's undies, and when you ask for them, he attacks.
Sproink's vulnerable point is his belly button. At first, Sproink protects his belly button with pails, so you have to target his head. Eventually Sproink will uncover his belly button, so target it to damage him. After a while, Sproink will fall over. Then after you attack him more, he will quickly charge up his Soultimate Move, Squealing Boil, which hits everyone in the front row with fire. Then he goes back to covering his belly button, so you have to target his head again and repeat the process until Sproink is defeated.
Yo-kai Watch Power Up!
Afterward, you go to Timers & More and automatically give Mr. Goodsight the undies, as well as the watch parts. He upgrades your watch to Rank D. After this, you can take requests from Mr. Goodsight to upgrade your watch further.
You can now accept the quest Fusion Time! at the temple at Blossom Heights.
This begins the chapter The Ring in the Pond.