Peaceful Rest Valley
Pencil Predicament
You probably have a good idea of what's next.
Grab some extra food in Twoson before you go back to the Pencil Statue.
When you are ready, go back to Peaceful Rest Valley to where you found the Pencil Statue. Go to your items and use the Pencil Eraser, magic will ensue.
Through the Valley
After the pencil is erased you can explore the area to find some pretty useful items.
Refer to the map as for where to find the items. Or if you want a challenge just explore without the map for a bit.
Beware of the Territorial Oak enemy. They can really blend in with the other trees in the area if you're not paying attention.
They can really pack a punch when they burst into flames. Make sure and kill these last if you're in a battle with more than one enemy.
Curious Shack
As you near the tunnel that leads to Happy Happy Village, you'll see a small shack in the middle of the valley.
You can't get to it from the area you're currently in but don't worry. You'll get a chance to check it out soon enough.
After you're done exploring Peaceful Rest Valley, find the tunnel that leads to the next area.