It begins with a long, slow hiss. The valves open, and a thick fog is released into the air, pouring from the roof of Dogo Onsen Honkan, the famous three-tiered bathhouse built in Matsuyama, Ehime Prefecture, in 1894. It flows down the side of the building, past bathers in bathrobes on the open balcony and begins to settle on the ground.

Soon this “fog sculpture” by Japanese artist Fujiko Nakaya will have compeletely enveloped the crowd gathered below: bewildered children, TV crews, elderly locals and tourists in yukata (bathrobes) coming from an afternoon hot-spring excursion. For a brief moment, the environment around the old bathhouse disappears into the asynchronous fog and Dogo is lost in time; was this what the area looked like to nomads 3,000 years ago, when they discovered the geothermal springs in this area?

The fog sculpture is one of the centerpiece works at a new art festival on the island of Shikoku called Dogo Onsenart 2014. “The fog is also showing you things in the surrounding environment you can’t see; those things are taking form through the fog,” says Tsutomu Okada, chief curator of the event. “It’s expressing the unseen environment around the onsen.”

The wider art festival, too, reveals another kind of unseen environment: one where a local community struggles to define the value of its town. Is art the right scale to measure whether the small hot-spring resort is successful? Dogo Onsenart is less about the artists who have come here — Yayoi Kusama, Nobuyoshi Araki and others along with a clutch of foreign artists hailing from France to Australia — and more vitally, about the efficacy of contemporary art in defining the value of regional areas of Japan. The head planner of the event, Tomoharu Matsuda, says Dogo Onsenart is “modern-art outreach.” But what does that really mean, especially to the people being reached out to?

Dogo is Japan’s oldest hot-spring resort (so says every item in every tourist shop nearby) and this year marks the 120th anniversary of Dogo Onsen Honkan, the first bathhouse in Japan to be designated as an Important Cultural Property and the spiritual heart of this little onsen town located a short tram ride from downtown Matsuyama. To celebrate the anniversary the city has collaborated with Spiral, an arts production company based in Tokyo, to put on the Dogo festival. In addition to the work in and around the Honkan bathhouse, nine artists were given a chance to redesign the interiors of hotel rooms across the town.

What makes this festival special on one level is that the redesigned rooms can then be rented overnight from April 10 till Dec. 31, or visited during the day, after guests have checked out (at a cost of ¥500-2,000). The Spiral team spent months working with local hotel owners to convince them that the project was beneficial (which explains the “outreach”), and carefully matched each artist to an appropriate hotel or ryokan.

In some cases the combination works brilliantly, such as Akira Minagawa’s uncanny room at Hanayuzuki, where even the walls and roof are lined in grids of square tatami. In other cases the spaces are pleasantly creepy, with Japanese photographer Araki’s room, a classically plain space, featuring large images of women in bondage, defiantly glaring at guests from the walls and sliding doors.

Sleeping inside an adult-rated installation provides a rare chance to get intimate with artworks you might usually only see in museums, coffee-table books or online. The only downside is that sometimes art looks better when it’s not staring at you, naked and tied up in ropes, when you wake up in the morning.

Fujiwo Ishimoto, textile designer for Marimekko, has decorated his room with lamps and reupholstered the chairs; some other artists, such as photographer/model Kiki, also seems to have taken liberties flexing their interior-design muscles, rather than really engaging deeply with the space or the experience of the guest.

The most luxurious (i.e., expensive) is Shuntaro Tanikawa’s austere room of poetry at another ryokan, Dogo-Kan, which includes a small garden next to a teahouse and a poem that can only be viewed through a microscope.

Viewed from afar, the festival is an expression of a cohesive vision for Dogo, a town that wants to modernize and attract more culture-savvy visitors through art. “We didn’t come here to make an art show; we came to help the development of the town,” says Okada.

But under scrutiny, not everything is as it seems. Although many visitors will come for the artworks, there is another layer to Dogo Onsenart 2014: This festival is about the changing structure of tourism, town planning and cultural power in Japan’s marginal towns. Other art festivals in Japan (such as the Setouchi Triennale) have specifically been designed as interventions to stem the tide of urban migration away from dwindling island communities, and revivify them through art. This festival has different, but related, goals.

“They were already doing fine before we showed up,” says Matsuda of Dogo’s level of economic prosperity. “Basically they were selling their history; it’s the oldest onsen in Japan. … But the style of business is really old here. So if they just left it like this it’d be gone in 20 years. (The festival is) a bit of a preventative measure.”

“I really want the hotel owners to feel some sense of ownership, that they are working with the artists. It’s good for them and good for the town,” says Okada, expressing the difficulty with convincing hotel owners about the value in putting X-rated photos of women in bondage on the walls. In the end it has been a success, with the owner of Kowakuen, the hotel hosting Araki, beaming as he explains his love for the photographer’s depiction of “regular women” made to look “powerful and incredibly beautiful.” But perhaps no owner is more involved in this experience than Mitsuhiko Miyazaki, the head manager of Takaraso Hotel, which features one of the festival’s most popular rooms — made by dotty artist Yayoi Kusama. Miyazaki has capitalized on the experience in ways the others have not, by constructing a Kusama cafe in the lobby next to a functioning vending machine selling panties designed by the artist.

Obviously he is positive about the festival and proud of his Kusama room, but speaking with him about the outreach aspect of the festival — where art appreciation spreads through the town, preventing future decline — a more complex picture emerges.

“I have already tried three times to change things in Dogo,” he says, referring to his attempts to reverse the effects of modernization on the town. Most spectacular are his efforts to pre-modernize the area around the Honkan. He convinced a pachinko parlor to take down its neon sign (which was ruining photos of the bathhouse) and changed signage and construction materials nearby to match the scenery.

High above it all, in Kusama’s room at Takaraso — surrounded by literally thousands of her manic dots, in the glow of an LED love heart with a life-sized naked photo of her younger self watching you (and a recording of her croaky voice singing a melancholy folk song in the background) — it’s hard not to see the appeal of a festival like this. It’s a surreal, rare experience.

Dogo Onsenart is a valuable addition to Japan’s roster of contemporary art festivals, and hopefully it will be back as a biennale or triennale over the coming years, with an even thicker fog, revealing even more about the hidden environments of Japan’s marginal towns.

Dogo Onsenart runs through Dec. 31 at various venues around Matsuyama, Ehime Prefecture. Based on four people staying in a room, one night costs between ¥19,500 (Yayoi Kusama’s Room at Takaraso Hotel) and ¥42,720 (Shuntaro Tanikawa’s room at Dogo-Kan) per person. 089-921-6464; www.dogoonsenart.com