The problem is not the sleep but rather that the main thread almost always acquires the lock before one (and occasionally both) of the created threads does. If you print just inside the synchronized blocks it's much more clear what is going on:
synchronized(obj) {
System.out.println("this thread acquired the lock");
You'll see the output is almost always Thread #1, then the main thread, and finally Thread #2 after Thread #1 completes (but main has already returned).
If you run it enough times sometimes both child threads do acquire the lock first and it completes.
The reason moving the sleep to outside the synchronized block in the main thread works is it allows both child threads to reach their respective wait statements.