Question: The term is [妖精](https://zh.wikipedia.org/wiki/%E5%A6%96%E7%B2%BE), which can be translated into English as "fairy", "elf", "goblin". As noted, the Japanese literature uses 妖精 to describe the European fairy. The English translation of 白骨精 in 西游记 (Journey to the West) is "white bone demon". So, this word can be translated into English as fairy, elf, goblin, or demon. 

Let's say an author is writing a fantasy story in Chinese first, using terms that are understood in a Chinese society. Then, the same author translates his/her own story into English and faces a problem. Which term should 妖精 be translated into (fairy, elf, goblin, or demon)? Or are the differences between the terms negligible, so the author can just pick a random one and go with it?

Answer: 
The differences between 'fairy', 'elf' 'goblin' and 'demon' are *not* negligible. The fact that a dictionary offers you all of them, or that all have been used in different setting in the past, does not imply that all those words mean the same thing, but that in different situations or contexts, they can be used to describe a Yōsei. (That's the transliteration of the Japanese creature you wish to refer to, right?)

Let me reiterate that: in a certain subset of contexts, 'Yōsei' best translates as 'fairy'. In other contexts, it does not. In a certain subset of contexts, 'fairy' best translates as 'Yōsei'. In other contexts, it does not. Their semantic fields do not wholly overlap.

To find the right translation, you need to have a good understanding of the differences between the various possible terms in the target language - in your case, the difference between 'fairy', 'goblin', 'demon', 'elf', 'spirit', etc. Then, you can pick the word that best fits what you're trying to convey in your story.

Alternatively, you can use a transliteration - 'Yōsei'.

What are some considerations for or against using transliteration rather than an (inexact) translation?

* First, is your Yōsei a major story element, or something mentioned in passing? For something mentioned in passing, it makes less sense to go through the effort of transliterating, and demanding of the reader to learn what a Yōsei is. (You would have to provide the information - sending your readers to Wikipedia is a no-no. But learning is still a mental effort, a small distraction from the story.)
* How different is a Yōsei from whatever word you picked as translation? The greater the difference, the more reason to use transliteration.
* Who is your target audience? If you're writing for children, it's better to stick to familiar words.
* How strongly is your story localised? If your story is very explicitly set in Japan, if there are many other cues that set your story in a specific location, 'Yōsei' fits into the setting, while something as European as 'fairy' does so to a lesser extent.

One thing to remember, if you choose to transliterate rather than translate the term: your English-speaking readers are unlikely to be familiar with Yōsei. You'd have to provide them with the necessary information. This is preferably done by means of the story itself, but if that doesn't work, a footnote is an option. Footnotes are often used in translations, in similar situations, but if you're translating your own story, you can alter it a bit, to incorporate the necessary information into the text.
Does it have to be an actual translation? Translations don't always work, as synonyms get lost in translation. As you mentioned, there is no English word that can mean "fairy", "elf" **and** "goblin". 

Translating to any of the options will mean that you lose out some of the ambiguity. Maybe it's important in your story that the creature's alignment is unknown. If you translate it to "fairy", readers will interpret it as good. If you translate it to "goblin", readers are liable to interpret it as conniving or evil. You can't retain the ambiguity.

Instead, you can simply pick a name without any inherent meaning (or suggestion about alignment), and then define the creature through observation rather than naming. 

The Wikipedia page you linked has an English variant, where the chosen name seems to be [**Yōsei**](https://en.wikipedia.org/wiki/Y%C5%8Dsei). Why not use that, so you don't bias your readers and are actually able to assume direct control over steering the viewer's observation; as opposed to relying on existing words with Western connotations? 

* **Fairy** = small and benevolent. Has a physical shape but they are inherently magic.
* **Spirit** = ghost or ethereal entity, lacks physical shape.
* **Elf** = humanoid creature with magical affinity and often has an expanded lifespan. Often acts as a counterpart to the human race. Alternatively (but less commonly), very similar to a fairy but not *as* magical in nature.
* **Goblin** = Conniving, tinkerer, likely evil (or at least lacks moral principles). Humanoid, but lesser to elves and humans.
* **Demon** = almost definitively evil. Possible religious connotation (demons are to the Devil what angels are to God; henchmen). Known to possess humans.

These are in no way guaranteed traits, but if the reader reads the word, they are liable to make inferences as to what the creature is like.

Because 妖精 can mean all of these things *at the same time*, the reader is therefore unable to make a choice between the listed interpretations. They must assume a generalized shape. But as English lacks a word that encompasses all definitions, you're much more likely to have your English readers pidgeon hole your creature by the common definition of the word you chose to use.