Kappa-the Kappa is a mythical creature that is supposed to live in rivers, lakes and ponds in Japan. It cannot live in the ocean. In stories from long ago it is said that if you meet a Kappa near a body of water the Kappa will try to take you with him and drap you to the botom of the river, drowning you. To survive such a situation it is said that if you meet a Kappa you should bow. When the Kappa bows in return the water that is stored in the bowl-like area on the top of his head leaks out. He is then forced to go back in the water as Kappas cannot survive without this water on their head. By the way, there are many versions of the Kappa nowadays besides the one you see here. There are many cuter, more cartoony versions seen nowadays in merchandise, books, commercials, etc.

Picture taken from the book-"Nihon no Youkai" from Kawade Shobo Shinsha