It's a term from the bible. In Judges. Basically it's a word that you can use to identify who is really a member of your tribe and who is just a foreigner who is infiltrating. When used to rout out spies, they're infiltrating so they're presumably pretty good or look similar, so we're going to have to come up with something that really separates out the natives from the foreigners. And for their accents, the spy's pronunciation 'shibboleth' (on the 'sh' and 'th' IIRC) would reveal that they aren't actually from Israel. Lollapalooza was used in wwii, because the Japs struggle with l's and r's.

Basically that's what you do, take the sounds that that language doesn't have and struggles with, and ask them to say a word with that set of sounds or with that sound in it many times. Not just that one sound by itself at the start of the word, too easy. The better Japanese infiltrator might be able to say 'language' or 'limited' just fine. The difficult sounds should ideally be throughout the word and with other difficult sounds right near them making pronunciation harder for them. That's why 'lollapalooza' is a better shibboleth.

But you can go outside of just words, and into gestures and customs (like in this example of 'going on about capitalism'). There's a famous scene in inglorious bastards where him using the index, middle and ring finger, rather than the thumb, to count, reveals that he's not German. How true that is in Germany, I don't know. But for the purposes of the film, this is what gives him away, and could be used as a shibboleth.