The Country where Gods Live is the 8th chapter in Tsubasa: Reservoir Chronicle.
Syaoran, Fai and Kurogane return to the Arisugawa's place after the skirmish. Sorata arrives home as well, just in time to listen to what happened to them that day. They tell him about their respective experiences with the mysterious beasts that came out of them. Sorata nods knowingly and tells them that those beasts are their kudan. Apparently, in Hanshin, there are 8 million gods co-existing with people. He continues to explain that the gods and the people both protect the country. Sorata tells them that they're lucky that in Hanshin, they wouldn't have too much outside obstacles in their search for Sakura's feathers, as the country doesn't have war or criminals.
Arashi, meanwhile, realizes the possibility that the feather must be in a kudan, especially since Mokona detected the feather just as sudden as it appeared and as it disappeared. Unfortunately, there is no way to know whose kudan the feather is in (there were too many kudan participating during the territory fight).
Sorata ponders the situation and theorizes that Sakura's feather must definitely be with a strong user. Sakura's memories are very strong, like crystallized pieces of her heart. As the kudan are controlled by the heart, it only follows that whoever has a strong heart will have a strong kudan as well.
Sorata then drags Fai and Kurogane to go and grab dinner. Syaoran offers to help, but Arashi suggests that since he hasn't been able to stay with her all day that he should stay and sit with Sakura instead. As soon as everybody leaves, he looks at her, a sad look on his face, as he remembers another time in their childhood when he had to sit on her bedside. He grips her hand, just as he did back then and promises to continue searching for her feathers so that she can wake up quickly.
The next day, the trio go out to search for Sakura's feather again. This time around, nobody's kudan is out, which makes their task of finding the feather much harder. Suddenly, a little boy's head pops out of the wall, scaring Syaoran out of his wits. It was Masayoshi's kudan. Masayoshi himself comes running a few moments later, again volunteering to be their guide around the city. Syaoran was impressed with his kudan's ability to be able to find any person who Masayoshi has met -- but Masayoshi insists that his kudan is actually very weak.
A high-pitched shriek pierces the air, and before any of them knew what was happening, a giant kudan in the shape of a bird grabs Masayoshi and Mokona away! And, at Syaoran's feet, a letter flutters down: "I'm waiting at Hanshin Castle."