I've alluded to the fact that I don't believe 'showing' the villain is a good idea in horror games, and this goes doubly for RPG Maker based games. The limitations of the graphics make it impossible for the creature to ever match the imagination of the player. So, while the ghosts will be seen, such encounters will be comparatively rare.
As of now I don't foresee much happening in the way of combat, save for large encounters that will rely on puzzle solving. However, there will be 'critical moments' when the player will be tested by events happening at the haunted location. During these critical moments, events will occur that will be incredibly stressful for the character, draining their sanity (HP). If the player does not find a way to end the source of the strain, the player's meter will hit zero and they will incur a game over.
These events will pile up over the course of an investigation, requiring the player to find ways of calming their nerves a bit. Splashing water on your face might help restore a few points as you calm down, or taking medication to steady your nerves. Medication can be purchased between stages, but will always be very costly to ensure a player cannot stockpile on them and ruin the threat presented by game stages.
As I consider this mechanic and its implementation, I will be careful to balance the game element with the need for a player to feel constantly threatened.
