This item is acquired by ringing the Iron Bell of Senpou Temple. This will increase the difficulty of enemies but will increase their spoils as well. This effect is not permanent since you can use the Bell in your possession to make the demon to leave and restore the default difficulty. If you feel like taking the challenge again, you can fast-travel to the temple via Sculptor’s Idol there. From the fort guarded by Tenzen Yamauchi (before reaching the Underbridge Valley), you can follow the path past the broken bridge that leads to a small temple. Read the note and it will tell you about the Headless.
Grapple to the branch ahead then look down by the cliff face to find a ledge you can grab on. Jump towards the cliff and keep pressing the square button to grab. Shimmy to the next ledge then grab the item. From there, jump to the lower ledge to find a cave.
Enter the cave until you reach a dark cavern. You should see the Headless there and it will be difficult to fight it since it will release a supernatural haze that will slow you down and prevent you from dodging. You don’t need to fight it for now so take the path behind it which will take you to the shinobi escape door. Hug the wall with the effigy to reach the Temple.
There’s a quick but easy-to-kill enemy there so finish it off. Don't forget to pick up the Black Gunpowder beside the black urn. Commune with the idol outside so you’ll have easier access to return to the bell if you want to take on the challenge again. Ring the bell if you want to make your life harder.