This merchant is right beside the Abandoned Dungeon Entrance Sculptor's Idol. You can find it on the way to Senpou Temple.
First, you have to reach the Ashina Castle Gate sculptor’s idol as shown below. From there, approach the praying old woman.
Across her is a branch that you can grapple. Find the nearest ledge where you can jump off then grapple to that branch.
Go past the opened gate to find two enemies talking to each other. There’s no way around them so eavesdrop first then take them out.
The highlighted enemy above carries the Gatehouse Key, a unique item needed to unlock the gatehouse in Ashina Reservoir, containing Gyoubu’s Broken Horn. This item is required to craft the Loaded Spear shinobi tool. If you progress too far in the story, this enemy will disappear permanently, preventing you from getting the key and looting the broken horn. Kill this enemy as early as you can to get this key.
Continue to the next gate and reach the roof to find a large enemy with three pet wolves. This enemy is not a boss. Kill his pet wolves with your shuriken then carefully sneak around him to perform a stealth kill. (You’ll get a Scrap Magnetite from him after killing him for the first time)
Enter the next building and you’ll find the Abandoned Dungeon Entrance sculptor’s idol. After communing with it, you’ll find the merchant a few feet away from the idol.
Cavern path to Senpou Temple
Senpou Temple, Mt. Kongo can be reached by getting past this cavern.
Items for Sale
Notable items for sale: Mask Fragment (Dragon): Part of a set. Prayer Bead: Part of a set needed to permanently upgrade your HP and posture. Dragon’s Blood Droplet: Required item for Dragonrot Restoration. This seems to get restocked whenever you use one from your inventory.