Choose the man from the source by pen tool, then cut to the new document.
The main part of making the droste effect is using the action function in PTS. Go to Windows -> Action -> Create new action, name it as "droste" or something you want, then it will start to record your acts.
Duplicate the man layer, put the new one below the original.
Go to edit -> Free transform. Select 80% of width and height. Move the center of this layer to the end of the sword (this layer will be rotate around this point). Select the rotation by 30 degree. Now stop the recording and just re-play it until you get the desire result

With the shinobi, just put layer below layer with reduce size (80%) and position the order along with the sword.

Put the background to the lowest layer

Use the lens blur to make the Depth of Field, focus on the place that two men standing