A government panel on Monday approved the use of paid accommodations in private homes in residential areas, where hotels and inns are banned from operating in principle.
The move is part of government efforts to address the lodging shortage as foreign travelers visit ahead of the 2020 Tokyo Olympics.
The decision by the panel, set up by the Health, Labor and Welfare Ministry and the Japan Tourism Agency, is expected to pave the way for the spread of the fledgling minpaku industry, in which private rooms, apartments or houses are rented out as accommodations.
In its final report Monday on the planned minpaku law, such businesses will be allowed to provide accommodations for up to 180 days a year.
According to the revised government ordinance under the Inns and Hotels Law that took effect in April, individuals seeking to launch such a business can easily obtain permission because they are no longer required to provide as much as floor space for guests as before, and won't have to set up a reception desk if certain conditions are met.
But concerns remain over potential problems with people residing near such facilities, including noise complaints and malicious business providers.
The health ministry is looking to submit a bill to the Diet by next March after discussing it with the ruling coalition, led by the conservative Liberal Democratic Party.
While the final report permits minpaku businesses to operate in residential areas, it also allows municipalities to establish an ordinance that can reject minpaku businesses in such areas.
Those who want to provide homestay-style minpaku lodgings, in which guests stay together with home owners, can start their businesses by just notifying their local governments.