Okay, honestly, I only started thinking this because I noticed Takahiro Sakurai voices both, but it's not that out there, is it? It's been noted that both shows have similar formats and concepts. The Medicine Seller is immortal, and if he is a mononoke like on Mononoke's WMG, who says he can't shapeshift? He didn't bother back in the 1920s because while his outfit was rather out of place, there were still people running around in kimono back then, so nobody made a huge deal out of it. Nowadays everybody would call him out on it, so he traded in the ridiculous kimono for a ridiculous Aloha shirt. As for whatever happened to his sword...perhaps it became corrupt someway or another and became Heart-under-blade/Shinobu, who has occasional access to an absurdly sharp sword.