Im putting my vote in for Kyoto as well. I don't think it deserves the beating it got (it still is one of the most beautiful places on earth, and nowhere is perfect even if it has some urban sprawl) and it most certainly is the most beautiful city in Japan. I warn first time travellers away from Tokyo because I think the city is a bit too westernized, but Kyoto is the heart and soul of what is japanese. There aren''t many spas around though, But if you have the money, and want to see another beautiful part of japan, you can go to osaka then take a train to Wakayama Preficture (its pretty well the penninsula jutting out of osaka), which has several gorgeous spas. In particular you should check out Shirahama, which features several top notch resorts and real hotspring spas for pittance (my family lives in that area and the baths there are amazing)
hope that helps