Two gods born from the human psyche, Philemon and Nyarlathotep, decide to have a bet - who is born of the stronger part of humanity? They choose a town known as Sumaru City, and put a spell on it so that rumours will start becoming reality, to see if humanity will achieve enlightenment or destroy themselves.
During the Tanabata Festival of 1989, Tatsuya Suou gets left at the Alaya Shrine by his brother Katsuya. He tries to amuse himself with a bat and ball, when he meets another boy called Jun Kurosu, left behind by his arguing parents. The two play together, and are eventually joined by a chubby boy from the sushi shop called Eikichi Mishina and a white girl with blonde hair and blue eyes named Lisa Silverman. They are all wearing masks from the TV Show Phoenix Ranger Featherman R, so they dub themselves the "Masked Circle" and decide to play with each other over the summer.
Meanwhile, a older girl named Maya Amano is told by her father Masataka to be brave and not cry, as he is going to his job as a war photographer, giving her a toy rabbit. Maya comes down one day to discover that her father has been killed in action. She continues to go to the shrine to pray for him, and discovers that the Masked Circle has come to play. They adopt her as the fifth member of the group, and she gets the other Phoenix Ranger Featherman R mask (which she doesn't wear), and she becomes their "Big Sis", teaching them the "Persona Game".
Tatsuya and Jun had a strong friendship, and swapped items from their fathers - Akinari's lighter and Mr. Suou's watch. They both looked up to Maya, Tatsuya as an older sister and Jun as a surrogate mother, and went to her house one day after dark, where she said that without their masks on and in the dark they looked like doppelgangers, teaching them the poem Der Doppelganger. One day, Maya discovers that her grieving mother wants to leave Sumaru City. When she breaks this news to the Masked Circle, they are very upset and lock her in the shrine, hoping that she will miss the move and stay with them. Tatsuya is opposed to the idea, so they lock him in as well. They try to amuse themselves by playing together.
Meanwhile, politician Tatsuzou Sudou gets his son Tatsuya enrolled in Seven Sisters High School, an elite school in Sumaru. Junko Kurosu, an idol, won "Miss Sevens" there previously and married Akinari Kashihara after a long time of having him as her trophy boyfriend. Junko later gave birth to Jun and became hailed as losing her looks and youthfulness. She started spreading mean rumours about Kashihara to get rid of him.
Nyarlathotep chose Sudou as his "Channeler", and told him about Hitler escaping from Germany with his Last Battalion and hiding in Antarctica, and aliens from the Pleiades called the Maiyans landing in Central America becoming the progenitors of the Mayans and leaving their ship Xibalba beneath Sumaru City. He chose to confide in his teacher, Kashihara, who, along with fellow teacher Maya Okamura, wrote a book about it called In-Lakech.
Kashihara ultimately killed himself in the gears of Sevens's clock tower. From then on, Nyarlathotep came to pick up Jun from playing at Alaya Shrine, manifesting as a perfect version of Akinari, as the Masked Circle believed of him from their meetings with Jun's dad - the first rumour to become reality. While Tatsuya and Maya were in Alaya Shrine, Sudou came down and burned it on Nyarlathotep's command. Tatsuya managed to escape, burning half of Sudou's face with his Persona. Maya then escaped using her Persona.
They were both unaware that the other had survived the shrine disaster, as were the other members of the Masked Circle when they came down to the shrine to let Maya out the next day. Thinking that they had killed Big Sis, the children hid all five masks in Mt. Iwato and promised to forget about the Masked Circle forever. This was ultimately what Maya's mother needed to take her away from Sumaru, and they moved away the next day.
Life went on in Sumaru City. Lisa's parents, Japanophiles from America, tried to get her to behave like "a traditional Japanese teenager". Instead she behaved like a modern one, using her unique looks to become popular at Sevens. Not knowing who Tatsuya was, she chased after him as he was the "brooding bad boy" of Sevens, acting stoical after injuring bullies with his Persona and regretting it. She also lied that she could speak English, and made friends with two girls named Sheba and Mi-po, who she believed were just leeching off of her popularity. She has since lost her dream of marrying her first love Tatsuya, and rebels from her parents by experimenting with drugs and dating older men for money.
Tatsuya's father, meanwhile, was a policeman who came close to realizing that Sudou was the arsonist. Realizing the scandal it could cause, Tatsuzou arranged for him to take the fall for another crime, causing him to be discharged from the police force, and locked away his son in a mental asylum. Katsuya abandoned his dream of becoming a pastry chef to support his family, becoming a policeman. Tatsuya began to hate his parents for resigning themselves to their fate and his brother for beginning to nag him mercilessly about his grades.
Eikichi's father, a very traditional sushi chef, often threatened him with his 18 forms of martial arts, trying to force him into taking over the business one day. Eikichi, however, is just a quite fat kid who likes to draw manga and is dating Miyabi Hanakoji, a very popular slim girl. Some jealous kids pull down his pants to humilate him, and Miyabi splits up with him. Eikichi goes on a diet and gets into visual kei (making sure his dad won't find out, as visual kei is the least traditional thing around), and then proceeds to pull people's pants down and kick their asses with his Persona to erase all image of him as a chubby loser. Interestingly, he genuinely cares for his new school Kasugayama High, trying to turn it around from a delinquent school to a nice place. With three students named Shogo, Ken, and Takeshi, he forms a visual kei band called "Gas Chamber" and they practice at Sumaru Prison. Hanakoji begins comfort eating because of her guilt over splitting up with Eikichi and becomes even fatter than he was.
Junko begins throwing herself at random men, so Jun goes with Nyarlathotep to Caracol, where he is made to believe that the Masked Circle killed Big Sis by having Tatsuya set the shrine on fire with his Persona. He plans to get revenge for this, but first he wishes to help Nyarlathotep, who has told him that a poem written in In-Lakech, known as the Maiyan Oracle, will enlighten humanity if fulfilled, evolving them to a state known as "Idealian", which is the peak of human evolution by virtue of being all of humanity's hopes and dreams incarnate. He dubs himself The Joker and forms a cult known as the Masked Circle. Jun also gets moved to Kass High after injuring people with his Persona constantly, due to being bullied for his feminine interests like astrology and flowers.
Jun spreads a rumour about The Joker Charm - if you dial your own cell phone number, then he will appear and grant your wishes. He uses this to recruit members, and the Masked Circle turns out to be quite similar to the old one. A male musician (pedophile manager Ginji Sasaki, wishing for a hot new group of teenage girls to manage), an older mother figure (Junko Kurosu, wishing for her looks back and unaware that her son is Joker), a female high school student who lost her dream (Anna Yoshizaka, Sevens student who often skips school with Tatsuya, former athlete who was injured and wishes for her injury to go away), and a lighter-flicking person called Tatsuya (Tatsuya Sudou, freed from the asylum).
Other members of the Masked Circle include Yasuo Inoue, who wished to become Kass High Student Council President, Sheba and Mi-po, wanting to form a girl group with Lisa, and Akari Hoshi, who believes herself to be a reincarnation of Ixquic, the Mayan warrior. Maya moves back to Sumaru later on and takes a job at Kismet Publishing, assigned to teen magazine Coolest and being assigned to the Joker Case, along with Yukino Mayuzumi from Megami Ibunroku Persona, now a photographer. It is this that will bring the five children of the Masked Circle back together in the present day...