This technique has never actually been seen in the manga, but it allows the user to spy on others without being noticed. It was invented by Jiraiya in his youth to allow him to spy on girls bathing without the risk of being caught. In the anime however, Hayate used this jutsu in a similar manner to Hiding with Camouflage Technique, as his body became transparent to mask his appearance. However, the user must remain stationary during the jutsu's use, as seen when Hayate moved out of the jutsu to alert The Third Hokage.
Interestingly, the Third Hokage was also interested in this technique, prompting Jiraiya to speculate that his sensei was as perverted as he was.