Athough I'm not gay, but I've been put off onsens so far in case going so openly naked among other nudes in such close proximity for such a long time gives me an erection and folks got unsettled & thought me gay. From your insights, it sounds like the possibility of an erection is no reason to stay away from onsens? What do you mean by 'anything goes'?
@Sten, I don't recall seeing a man walking around with an erected penis in an onsen/bathhouses, except in the ones that cater to bi/gay people, even there people generally use their washclothes to cover privates while walking around. Regular onsens is no place for a sexual contact.
That said, onsens/bathhouses that cater to bi/gay men is a different story (google "24 Kaikan" ). They have hot/cold pools, mist and regular saunas, cabins with peepholes even a general rest/sleep area. You can have sex in the rest area (which has lots of bunk beds, its dark anyway but you shouldn't be shy-lots of people), in fact lots moaning very late night. In cabins anything goes depending on both parties. In mist sauna usually handjobs and oral goes on.
Been to few of those bathhouses many times usually to enjoy hot water and relax after a long work day (even if it is called a "gay sauna" not everyone is there for sexual purposes, and there are a lot of straight people too). I too enjoy seeing cocks and for me its fun seeing people playing with each others cock even fuck each other.
I wouldn't keep away from onsens, if I were you, there is no reason for it. It's a very enjoyable bathing experience. Even if you go to a regular onsen, everybody there is for their own business, to relax and cleanse. It's rude to stare at people in Japanese culture so don't expect curious eyes on you. Like I commented in my other post Japanese people are not homophobic and I don't think at all anyone would think you are gay. Use your washcloth (you are given one while checking in to any onsen, or bring your own) if (un)expected happens..