Yanagi was just lonely (and guilty). I don't think he really wanted soldiers, but a young something(s) or somebody(ies) to take care of. Maybe to try, in his own way, to deal with his issues with the dead Lapras parents. Naturally, since Yanagi is missing a few crayons, he doesn't do a good job and ends up with making soldiers. It doesn't really explain how come Blue (and Silver, but he seems to be mostly clueless) isn't affected by everything, though.
I'm starting to think Yanagi needed more than one chapter to explain his character. I wouldn't be surprised if he wanted to be a (grand-)father, but the death of his Lapras warped his thinking. He still wants to be a (grand-)father, but he's too focus on reviving those pokemon that he tries to combine both. And failing miserably. I don't think he's exactly insane as much as too committed to realize his folly. Coupled with whatever happened between him and his friends (another thing to elaborate on), he definitely had nobody to tell how stupid he was being.
Of course, I could over-thinking all of that.