Hey Corwin, lemme throw a couple ideas your way.
#1) About the Demons being reliant upon humans for success. I don't think this is as bad as it initially seems. For one thing, demons making deals with humans is thematic, so it shouldn't be a thematic concern. For another thing, you don't have to be too discriminant as to
what indies you have on your team, so long as they are human and un-banishable (although heavy inf. is a suggestion). For a third reason, it's not unfair because, as has been said before, each nation plays differently. If it falls that Oni-Kings needs to be a Nation that hires indies to be successful, then that's just part of that Nation's style. If you think about Ashen Empire and how they really, REALLY benefit from hiring a few indie slave armies to protect/fight against priest armies, then it's a similar situation. Demons simply have a weakness, and it needs to be worked around. Saying that one should be able to play without any humans in the army is like saying an undead theme (Ashen Empire) should be able to play with 100% undead in the army -- they technically can, but it's not wise. Haha, you end up being like a prejudice demon lord who refuses to work with mortals and then gets trounced by more cunning enemies.
#2) About the whole retreating when turned into ghosts. I think this could go either way, gameplay-wise. You've listed the major downside already. You lose the battle. However, that's not really that bad considering your losing the battle when all the other nations would have as well! Think about the benefit, though. The survivability of the Onis goes up substatially, and a whole new game dynamic becomes apparent for Oni-Kings: they are very difficult to wipe out. I would say to make this work well though, Yomi would have to all flee to the same province and regroup; you might call them "masters of retreating" or something. Imagine losing a battle, but getting 66%-75% of your demonic army back at the end of the fight, one province back. That would frustrate the heck out of MP opponents. So, what we're really looking at is a trade-off.
The ability to hold out longer during a battle versus
decreasing casualties. In a strategy game, I would opt for the latter. In the end, most strategy games boil down to numbers of troops. Also consider that the ability to hold out longer during a
losing battle is not desirable anyway. I can see Yomi being very a desirable nation if they have the ability to trade losses with other nations and always end out on top. Of course, for this to work, the fleeing ghosts would have to be able to survive their flight, but I think that's very realistic considering they'd be fleeing as individuals, while their former squad would remain to hold the line. Heck, it would also just look freakin cool in the battle simulator!
Anyway, those were just little considerations. Hopefully I just presented a different way to look at it.
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PS -- Imagine adding the unflinching undead to an Oni army like that. The Undead would never flee, and every single demon soldier would get the chance to escape. Lot of potential.