In the Pokémon universe, Tim Goodman is a 21-year-old insurance adjuster who gave up his dream of being a Pokémon trainer following the death of his mother and his estrangement from his father Harry, a police detective. Tim is contacted by the police of Ryme City, a city where humans and Pokémon live together in harmony and Pokémon battles are illegal. He is informed by Harry’s friend, Detective Hideo Yoshida, that Harry was killed in a car accident. Tim goes to Harry’s apartment to sort things out and meets Harry’s police partner, a deerstalker-clad amnesiac talking Pikachu whom only Tim can understand; all others simply hear him say “Pika-Pika.” Tim accidentally releases a mysterious purple gas, “R,” from a vial he finds in Harry’s office; they are then attacked by a party of Aipom who became rabid under the gas’s influence.
The pair escape and Pikachu explains that after losing his memory following the crash, he believes that Harry also survived the crash as the police never found his body. They meet an informant of Harry’s, a Mr. Mime who directs them to an underground illegal Pokémon battle arena. The arena’s owner, Sebastian, recognizes Pikachu as the Pokémon who injured his Charizard in a previous battle and demands a rematch. He doses Charizard with “R”, stirring it into a violent rage and Pikachu is unable to summon his electrical powers to fight back. While attempting to save Pikachu, Tim knocks Sebastian over and breaks several gas vials in his jacket, sending the arena’s Pokémon into a frenzy. The arena is raided by police and Tim is brought to Yoshida, who reveals footage of Harry’s crash, explaining that it is impossible for Harry to have survived.
Tim and Pikachu are contacted by Howard Clifford, the wheelchair-using founder of Clifford Industries, who created Ryme City as a utopia for Pokémon and humans. Howard reveals that he was Harry’s last client and that Harry was abducted by a genetically engineered Pokémon called Mewtwo, who erased Pikachu’s memory. He warns Tim that his son Roger is behind the creation of “R” which he requested Harry to look into. Tim and Pikachu recruit aspiring journalist Lucy Stevens and her Psyduck and travel to the abandoned genetics lab Harry was investigating. The lab’s personnel had been experimenting on Mewtwo and synthesized “R” from his genes. They are attacked by genetically enhanced Greninja and Pikachu is gravely injured. Tim begs a Bulbasaur to help Pikachu and it leads them to Mewtwo, who heals Pikachu before being captured by Roger. Pikachu remembers that he helped Mewtwo escape from the lab and believes he was responsible for betraying Harry. Not trusting himself, he leaves Tim.
Pikachu comes across the crash site and finds evidence that it was the Greninja, not Mewtwo, who were responsible for the crash. In Ryme City during its Anniversary Parade, Howard reveals the captured Mewtwo to Tim, exposing himself as the true mastermind by taking control of Mewtwo’s body using a neural-link helmet that places his mind inside Mewtwo while his human body remains in the wheelchair. He explains that Mewtwo can fuse humans and Pokémon, allowing humans to evolve as Pokémon can and become one with them, but this can only be done if the Pokémon is in a confused state, thus the need for “R”. Believing this is the future of humankind, Howard releases “R” across the city using parade balloons and begins fusing humans with their Pokémon. Pikachu summons his electrical powers to battle Mewtwo while Tim fights Howard’s genetically modified Ditto, who had been impersonating Roger; the real Roger had been tied up and gagged by his father. Tim manages to remove Howard’s helmet from his body, freeing Mewtwo from his control.
Mewtwo restores the city inhabitants to normal, Howard is arrested, and Roger hires Lucy as a full-time reporter, vowing to fix his father’s mistakes. Mewtwo explains that Harry tried to save him from Howard and helped him escape, but was attacked by the Greninja. Pikachu had volunteered to have himself fused with Harry to save his life, the experience erasing both their memories. Mewtwo separates the two and Harry reunites with Tim in his human body. Tim decides to stay in Ryme City to become a detective and spend more time with his father and Pikachu.