Two threads, one Thread.sleep(1000) inside a synchronized block. What does the other thread see?

sleep suspends the thread and keeps every lock it holds. Object.wait() is the one that releases the monitor it was called on, and reacquires it before returning, which is precisely why wait must be called while holding that monitor and sleep may be called anywhere.

This is the mechanism behind a whole family of production incidents: an I/O call with a long timeout inside a synchronized block. Nothing is deadlocked, nothing is a race, and the service still stops responding because a hundred threads are queued behind one slow monitor.