The film opens in 1943 during the Pacific War. As the sirens ring out, Mahito Maki (Luca Padovan) awakens and runs out in a panic toward the hospital, which is on fire. People evacuate their homes while Mahito calls out for his mother Hisako, who is in the burning hospital.
Sometime later, Hisako dies, and Mahito leaves Tokyo with his father, Shoichi (Christian Bale), who runs an arsenal for the war. Shoichi remarries Natsuko (Gemma Chan), and she is expecting a baby. Mahito joins them at Natsuko’s estate where seven old maids also live. While walking up, Mahito and Nasuko notice a Grey Heron (Robert Pattinson) that lives in the area flying by.
Mahito tries to follow the Heron and catch it, but it is elusive. In his pursuit, he sees a tower on the grounds of the estate. Natsuko explains to him that the tower was built by her Granduncle before she was born. He was obsessed with seeking out other worlds and created a series of tunnels under the tower before disappearing from the family.
Mahito begins school but ends up bullied and picked on by the other kids. On his way home, he picks up a rock and hits himself in the head, giving himself a nasty gash. While he claims he just fell, Shoichi makes a donation to the school and pulls Mahito out. As he recovers, he finds a book called “How Do You Live?” written by Hisako for Mahito to read when he is older. He experiences nightmares of his mother perishing in flames.
Mahito runs into the Heron again after it mockingly calls out to him. He chases the bird outside and speaks to him, demanding to know what he wants. The Heron says Mahito’s presence is requested, and that he can take Mahito to his mother. A bunch of frogs surround Mahito’s body before the maids run out and fire an arrow, scaring them and the Heron away. They tell him that Natsuko has gone missing. Mahito notices her going toward the tower.
One of the maids joins Mahito as he walks toward the tower to find the Heron. Once he does, the Heron guides him into the tower where he presents Hisako to Mahito, except it is an illusion he made, and it melts when Mahito touches it. As Mahito angrily chastises the Heron, a figure above, the Tower Master (Mark Hamill), orders the Heron to be Mahito’s guide. The Heron takes the form of a short, pudgy, bald man when his beak gets pierced by an arrow crafted by Mahito with one of the Heron’s feathers. The Heron then makes Mahito and the maid sink into the floor with him.
Mahito ends up in another world on an island where he encounters a flock of hungry pelicans. He is spotted by a sailor woman, Kiriko (Florence Pugh), who keeps them away from Mahito, but she chastises him for opening the gates to the graveyard as a result of the encounter. Mahito joins Kiriko as she rides her boat to her home, explaining to him that there are phantoms in this world.
Kiriko brings Mahito to her home where she tends to the Warawara, little marshmallow-looking spirits that she feeds so they may ascend beyond the spirit world to be born. Mahito helps Kiriko cut open a big fish and later deduces that she is the same maid who went with him into the spirit world, as she has little figures of the other old maids who she lives with. At night, Mahito and Kiriko watch the Warawara ascend, only for pelicans to come and start trying to eat them. They are stopped by a young girl with fire powers named Lady Himi (Karen Fukuhara).
Mahito encounters the lead Noble Pelican (Willem Dafoe), who, as he lays dying from his injuries in the fire blast, explains to Mahito that the pelicans had no other choice but to consume the Warawara for nourishment. The Heron finds Mahito again and joins him for one more meal at Kiriko’s before they part ways with her.
As they move forward, Mahito helps fix the Heron’s beak hole since it is prohibiting him from flying in his natural avian form. They get separated again, and Mahito runs into giant parakeets. They claim to be taking him to find Natsuko, but they are planning to eat him. Himi scares them off with her fire powers. When he explains his situation, Himi says that Natusko is her sister and that her Granduncle (the Tower Master) created this world and ways to travel between other worlds.
Himi takes Mahito toward a door that can bring him back to his world, where he sees Shoichi and the maids frantically looking for him and Natsuko, while Mahito and Himi are being chased by the parakeets. Mahito chooses to stay so that he can help find Natsuko. There is a struggle with the parakeets, and Mahito loses consciousness. Meanwhile, one of the maids tells Shoichi how the tower was formed from a meteorite, and Hisako had disappeared after its creation for a year before mysteriously returning out of the blue.
For a brief moment, Mahito is taken to meet Granduncle, who wants him to be his successor in operating this world as someone who is a blood relative and free of malice since he hopes his new world can be free of all the horrors of the real world. Mahito acknowledges the scar he gave himself as him not being free of his own malice. When he comes to, Mahito finds himself in the captivity of the parakeets. The Heron sneaks in and knocks out some parakeets before freeing Mahito. They rejoin Himi as they come upon the room where Natsuko is being kept. The energy in the room causes bandages to envelop Mahito and Natsuko when he tries to bring her back, but she appears angry and tells Mahito that she hates him. When Mahito says that she will be his mother, she goes back to normal.
Mahito and the Heron go to free Himi from the parakeets. The Parakeet King (Dave Bautista) is working with Granduncle as a means to keep the world in order for his army. After freeing Himi, Mahito chooses not to succeed Granduncle since the world with malice is where he still has his friends. Parakeet King is enraged and wants to take over, but he collapses Granduncle’s stacking blocks that kept the tower together. The tower, and thus the entire world, begins to collapse and disintegrate. Granduncle disappears into the void after speaking to his descendants one last time, and Himi weeps for him. Everyone begins to escape through the doors. When Mahito tries to get Himi to join him, she declines, as she reveals she is a younger Hisako and will go on to be his mother. She bids Mahito and Natsuko farewell before joining Kiriko through their own door. Mahito, Natsuko, the Heron, and the whole flock of parakeets make it out of the door just as the tower comes crumbling down. Mahito and Natsuko reunite with Shoichi, and Kiriko returns since her young self gave Mahito a charm that looked like her. The Heron tells Mahito he will eventually forget the other world, and he bids him farewell as a friend.
Two years later after the war, Mahito is now returning to Tokyo with Shoichi, Natsuko, and his little brother.