A capsule hotel is a system of extremely dense occupancy. Guest space is reduced in size to a modular plastic or fibreglass block roughly 2 m by 1 m by 1 m, providing room to sleep and little more, although facilities usually include a television and other electronic entertainment. These capsules are then grouped and stacked, two units high. Luggage is usually stored in a locker away from the capsule. Privacy is maintained by a curtain at the open end of the capsule but noise pollution can be high. Washing facilities are communal and there are often restaurants, or at least vending machines, and other entertainment facilities.

This style of hotel accommodation was developed in Japan and has not gained acceptance outside of the country. The Japanese capsule hotels vary widely in size, some having only fifty or so capsules and others over 700, and are often male only. Clothes and shoes are exchanged for slippers and a yukata on entry. The benefit of these hotels is price, usually around 3-4000 yen a night, and convenience.

The first capsule hotel was the Capsule Inn Osaka, in the Umeda district. It opened in 1977 and the initial room rate was 1,600 yen.