After saving him in the Twinside wreckage and bringing him to her home in the slums, Kihel tells this to Dion as they watch the floating lanterns on the river:
"Grandmother told me spirits sometimes get lost and that the lanterns guide them to their proper place."
Video below of the in-game cutscene for reference.
This is foremost an allusion and a link to water lantern festivals, as well as the tradition of remembering the dead found in Japanese and other Asian cultures. In the following, we will explore why the lanterns in this scene serve to both guide Dion back to Joshua’s side, and are also representative of Joshua himself as a guiding flame for Dion to find his purpose and arrive where he belongs.
First, let’s discuss Obon. It is believed that souls of ancestors return during this time, and small Obon lanterns on stands (obon chōchin 盆提灯) are lit to temporarily welcome back the spirits of deceased ancestors, while offerings are made at household altars.
Family members also hang lanterns in front of their homes in order to help guide the spirits of the ancestors back to where they dwell in the afterlife. At the end of the Obon festival, the lanterns are released into the nearest body of water so that the spirits can return to the other world.
The most straightforward interpretation, of course, is that Dion gets to witness how the people of Twinside grieve their lost ones. However, he is the point-of-view character in this scene with Kihel, which means that everything we are shown is through his perspective.
Before Bahamut’s rampage and later, when he returns to Twinside to see with his own eyes the destruction and grief he caused, Dion is trapped in limbo, unable to move on, with only frustration and later regrets for company. His anger and impotence is visible through all of his interactions, whether in the Sanbreque camp or the Oriflamme Imperial Seat.
That is, until he meets Joshua again.
The person who pulls him out of the mire and gives him a purpose, an answer, is Joshua, just like the lanterns which are released on water so that the spirits can return to their world.
Moving on from Obon, let’s discuss the Chinese Lantern Festival.
During this festival, children go out at night carrying paper lanterns and solve riddles on the lanterns. In ancient times, the lanterns were fairly simple, and only the emperor and noblemen had large ornate ones.
In modern times, lanterns have been embellished with many complex designs. For example, lanterns are now often made in the shape of animals. The lanterns can symbolise the people letting go of their past selves and getting new ones, which they will let go of the next year. The lanterns are almost always red to symbolise good fortune.
Dion telling Clive and Joshua that his life ended in the Dominion can of course be interpreted as him being ready to self-sacrifice himself to atone, but there is also the nuance and hope of him discarding his past self and welcoming a new one, with Joshua’s guidance and support.
Joshua is the one who appeared in front of Dion with the answers to the frustration and anger he felt. He is the flame, the guiding lantern that brings Dion to his proper place.
Furthermore, the lanterns light the way for Dion to return back to Joshua’s side. As Dion walks out of the slums, we see a shot of the lanterns flowing down the river. The wind picks up, and he looks up at the Moon and Metia, and promises Joshua his wings. He is ready to return to Joshua’s side and offer him his strength.
The lanterns guide him back to his new world at Joshua’s side, and they symbolise him letting go of his past self and becoming a new man.
The lanterns guide Dion to a decision to atone, and he promises his wings to Joshua while moon-gazing.
Joshua and Dion think about each other at the same time.
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