The 2017 Japanese animated film Lu Over the Wall blends music and psychadelic imagery with realism, and features a version of merfolk in a big way. Teenager Kai Ashimoto lives in the fishing town of Hinashi, which has long-held legends about dangerous merfolk who live in Okage Rock, a huge rock formation that looms over the town. Kai is generally apathetic about life, and life in Hinashi in particular, until fellow schoolmates Yuho and Kunio invite him to join their band.
As it turns out there is some truth to the legends, and Kai learns in quick succession that: merfolk are real, they are drawn to music, and they fear sunlight. He learns all of this from Lu, a literally "little" mermaid who's drawn to him and wants to be his friend. She has powers and music of her own, and she sort of becomes part of the band, because of her own musical abilities.
There's a lot going on in this film: Kai's friendship/band drama, Kai's family drama, Lu becoming a viral sensation when she's seen in public, and the townsfolk overreacting in hot-cold-hot ways when they learn that merfolk are real. There's some cool tiny subplots in there as well, especially of two people (Kai's grandfather being one of them) who have had grudges against merfolk for years for "eating" their loved ones, when they actually don't know the full story of what happened. Overall it's a trippy film that utilizes visuals and music in surreal ways to tell a fantastical story.
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