It's true that pretty much all of the backstory in Touhou is deeply rooted in Japanese history and myths, but I don't think that's really an excuse to not release the games over here. Most people totally ignore the backstory when they first play the games, and simply enjoy them for what they are: danmaku shooters with colorful characters and great music. Plus, it can have the opposite effect. I was never interested in Japanese folklore before Touhou, but now I find myself deeply engrossed in it. I think instead of needing to know Japanese culture to indulge in Touhou, Touhou can actually help Western players understand Eastern culture better. Of course, if they choose to, because the entire point of the extended universe is to exist as side-material for the passionate fans to get into. So, I really think it'd be fine to localize Touhou here, because I doubt there's that much keeping players from enjoying it. Aside from it being a danmaku game anyways, which isn't a genre most people are used to over here.
Of course, if the localization was handled poorly, all bets are off. If any single thing was changed to "appeal to the Western audience", I'd simply prefer shipping the games from Japan and patching them. And I figure most others would do the same. So, I understand why ZUN is skeptical of letting others handle the localization.