Airbnb Inc. has frozen a major portion of its home listings and guest reservations in Japan at the behest of local regulators, but promised to compensate travelers who find themselves stranded at the height of the summer tourist season.

The startup had warned hosts it would delist those that hadn’t registered with local agencies for licenses, as required by stringent new rules governing home-sharing that take effect June 15. But Japan’s tourism agency on June 1 notified home-sharing services they must cancel reservations made with unregistered listings -- a full two weeks before the deadline. That surprised Airbnb, which plans to begin notifying thousands of visitors about the cancellations, said Mike Orgill, the company’s head of public policy for the Asia Pacific.

Airbnb has established a US$10 million fund to cover the additional expenses of affected guests, and plans to offer full refunds and coupons worth the value of their booking. It’s also deactivated all Japanese listings that hadn’t completed registration with the government, Orgill said, declining to give specifics. The Nikkei newspaper reported that listings across the nation had declined by almost 80 per cent to just 13,800.

Airbnb had welcomed regulations that legitimized home-sharing in Japan, one of its fastest-growing markets. Intended to bring clarity to a legal gray area and level the playing field for hotels, the rules limit private home stays to 180 nights and require hosts to register with local governments. But local authorities have since piled on more restrictions and raised the hurdle for hosts trying to go legit. The Shinjuku ward of central Tokyo, for example, prohibits lodging in residential areas on weekdays, while Kyoto limits stays in such locations to about 60 days between January and March for hosts without a special license.

“We always knew that the number was going to come down and that it would set us up for sustainable growth in the long run,” Orgill said in an interview in Tokyo.

In past months, hosts in Japan have received emails from Airbnb urging them to register with local authorities. The company even set up a website to guide its users through the process. Those who did not secure approval would be removed once the new law took effect June 15, it warned.

Hosts willing to jump through all the hoops still have to contend with a market that’s shifting from couch-surfing toward professional services. Japan’s Rakuten Inc. announced plans to to enter the home-sharing business. The e-commerce giant has teamed up with real-estate listing operator Lifull Co., Expedia Group Inc.’s home-rental subsidiary HomeAway and, Airbnb’s biggest rival in China.

Airbnb, valued at US$29 billion by CB Insights, is counting on Japan and China to turbo-charge its longer-term growth in the region. The startup is courting travelers to and within those countries with local excursions and services, while exploring newer areas from luxury tourism to airfares.

Japan, in turn, is keen for tourism to help jumpstart a flagging economy. More than 26 million tourists visited Japan in 2017, topping the record for a fifth straight year according to the nation’s tourism organization. That number will probably rise as Japan prepares to host the Rugby World Cup in 2019 and the Olympic Games the following year.

“We are pretty confident that we will grow back” in Japan, said Orgill, who had previously worked as a public policy lead for Google in Singapore.