The decision was taken following a meeting between organisers for the Olympic and Paralympic Games, plus the Japanese government.
It was announced Tokyo will once more enter a state of emergency, which will run until at least August 22, amid rising coronavirus cases.
Japan’s Olympics minister Tamayo Marukawa is quoted as saying: “We reached an agreement on no spectators at venues in Tokyo.”
Tokyo 2020 president Seiko Hashimoto said it is “regrettable”, while adding: “A very heavy judgement was made…[but we] no choice but to hold the Games in a limited way.”
The decision was widely expected but marks a fresh blow for the Games, which were postponed by a year because of the global pandemic.
Many residents of Japan have expressed opposition to the Games due to the hordes of athletes, officials and media arriving from overseas.
While avoiding the huge numbers of infection rates seen in other nations, Japan has registered over 800,000 cases and 14,800 deaths, while 920 new daily cases were reported on Wednesday. There have also been concerns about the speed of the country’s COVID-19 vaccine programme.
Despite the vocal opposition, the government has pressed ahead with plans for the Games, which organisers stated in December would cost a staggering $15.4billion.
The Olympic Games officially get under way on July 23 with the opening ceremony, although softball and football start two days earlier, and run until August 8. Following that, the Paralympics are set to take place between August 24 and September 5.
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