Why is it that there are streets of ryokans (small hotels) in Japan, that won't allow westerners to stay there?
It appears to be racism, although I realize that they could be unfamilar with westerners and find it easier to stick to people they are familar with. However, I think it is extreme racism. I say extreme, because one doesn't usually turn down the chance to do business and make money.
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For a couple of reasons. One is because ryokans typically don't have staff who can understand languages other than Japanese, so they won't be able to serve foreigners to their standard of service. Second is because most all ryokan is built for people who have been raised in a Japanese cultural setting, thus, they won't be able to accomodate people who can't use chopsticks, can't eat raw fish, need a chair, can't handle taking baths with other people, and need various other special accomodations. So no, it's not racism.