[Oh. Oh, it's his favorite question--! Even if you keep calling him -san how rude stop it.]

The same way you'd create any story, mostly. A plot, first; appropriate, though- no one cares about the horror legend of someone's bad exam grade, or something like that. Rumors help.

Then, you combine the requisite parts-- [This is complete with a strange gesture of squishing an invisible something between his hands, before he holds up fingers to count off these parts-] Cast, narration, audience. When those things combine, the truly terrifying horror legend is born!