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The widely expected move was made following talks between the government, Tokyo organisers and Olympic and paralympic representatives.
It was “regrettable” that the Games were going to be held in a limited format, Tokyo 2020 President Seiko Hashimoto told a briefing, adding her apologies to those who had bought tickets.
Prime Minister Yoshihide Suga said it was essential to prevent Tokyo, where the highly infectious Delta Covid-19 variant was spreading, from becoming the source of another wave of infections.
The ban all but robs the Tokyo Games, which are scheduled to run from July 23 to Aug. 8, of their last hope for pomp and public spectacle.
Once seen as a chance for Japan to stand large on the global stage after a devastating earthquake a decade ago, the showpiece event was delayed by the pandemic last year and has been hit by massive budget overruns.
Medical experts have said for weeks that having no spectators would be the least risky option, amid widespread public fears that an influx of thousands of athletes and officials will fuel a fresh wave of infections.
Japan has not experienced the kind of explosive Covid-19 outbreaks seen in many other countries but has had more than 800,000 cases and 14,800 deaths.
Authorities have struggled to stamp out persistent clusters of infections, particularly in and around Tokyo, which reported 920 new daily cases on Wednesday, the highest since May 13.
A slow vaccine rollout has meant only a quarter of Japan’s population has had at least one Covid-19 vaccination shot.