Balgus already said it, but I agree.
“[I]The Cats encounter a group of paper warriors with a dark secret.”
[/I]Maybe the “dark secret” is that the paper warriors are the bad guys, and thus the ghostly things they are fighting are not evil. Therefore the Sword, like in the OS, is refusing to be used against an innocent being. And until Lion-O learns to keep an open mind instead of just going on first impressions, he can’t master Sight Beyond Sight.
Bingo
.
I didn’t even think of it at that angle. I figured the forrest itself was disabling the sword. Good theory.
I didn’t even think about the forest blocking the Sword. I thought the one elephant sent them to this forest because the Sword’s powers would be stronger there. That could be part of it too.
It’s just a continuation of the lessons Lion-O has to learn. In the last episode he was very quick to resolve the issue by going after the Wraiths which brought upon the Rock Giant.
In this one he will again probably be quick to decide that the resolution is to use the sword to vanquish the spirits rather then get all of the information first; that the forest may be trying to protect it’s self from the paper warriors.
Remember, the Elephants said everything has a balance. The paper warriors may be throwing the forest out of balance by exceedingly wanting more trees for paper.
I like the way you think Alex 
Hmmm…Lion-O can’t get it up. That’s embarrassing…
Holy Shinto!
Well, it is Japanese anime after all.
I wondered if the chief paper priest was actually voiced by Matthew Mercer dropping down his voice a register.
MGP
at least this time no one can say the people they meet don’t have any women.
I think I would have forgotton again that it is airing tonight if I hadn’t seen this post. Yay. I’ll hold off watching the previews since it airs in just a few hours.
another hint that they might be bad guys is that in the clip he says they’re the “wood forgers” but the crew called them the “war forgers” on the tumblr blog. also on the old leaked episode list this episode was called “The war forgers.” that would explain the title change. the old one would’ve been a spoiler.
http://crewofomens.tumblr.com/post/12648646210/dont-forget-lion-co-venture-into-the-magi-oar
And it’s probably the correct one, seeing that the sword refused to activate for Lion-O while the bird spirits seemed to be attacking them. Remember, in the OS the Sword refused to draw for Lion-O when he tried fighting Hachiman for the first time. And it also refused to activate against the giant guardian statues on New Thundera. 
Main shinto priest/wood forger/ whatever is not Matthew Mercer, but according to one of his Tweets:
“I did not, actually! However, the fellow who DID voice him is quite fantastic, and a pleasant surprise for all you Shogun fans ;)”
MGP
PS, I would have loved it if someone had echoed OS Tygra’s line from “All That Glitters”: "The Sword of Omens! It does not grow!
Agreed!
Hey that’s funny Nine Tiger, I too immediately thought of that line when I saw the clip, made me laugh.
Actually, it made me think of the Okami game where you use “the Celestial Brush, a gesture-system to perform miracles.”