Obon is an annual Buddhist event for commemorating one's ancestors. It is believed that each year during obon, the ancestors' spirits return to this world in order to visit their relatives.
Obon is observed from the 13th to the 15th day of the 7th month of the year, which is July according to the solar calendar. However, since the 7th month of the year roughly coincides with August rather than July according to the formerly used lunar calendar, Obon is still observed in mid August in many regions of Japan, while it is observed in mid July in other regions.
Japanese people clean their houses and place a variety of food offerings such as vegetables and fruits to the spirits of ancestors in front of a butsudan (Buddhist altar).
On the first day of Obon, chochin lanterns are lit inside houses, and people go to their family's grave to call their ancestors' spirits back home. It's called mukae-bon. In some regions, fires called mukae-bi are lit at the entrances of houses to guide the spirits.
On the last day, people bring the ancestor's spirits back to the grave, hanging chochin painted with the family crest to guide the spirits. It's called okuri-bon. In some regions, fires called okuri-bi are lit at entrances of houses to send the ancestors' spirits back. During Obon, the smell of senko incense fills Japanese houses and cemeteries.
Toro nagashi (floating lanterns) is a tradition often observed during Obon. At the end of Obon, floating lanterns are put into rivers, lakes and seas in order to guide the spirits back into their world. The customs followed vary strongly from region to region.
If you are having a struggle understanding this...think of "Dia de los Muertos", "Day of the Dead" May 5th, that celebrates the same concept.
-The more you know~