'Poor' Japan goes upscale.

Japan's economy has been stagnant or in recession for more than a decade, and the usual litany of woes has started to sound like a broken record: falling consumer sentiment, rising unemployment, the stock market in a slump, banks teetering on the edge of crisis.

So why are luxury retailers swarming into Tokyo with shiny stand-alone stores? Prada, for example, just spent $86 million to open a sparkling new Epicenter store in the upscale shopping district of Aoyama. It follows Coach, which opened one in April, and Louis Vuitton, which made a huge splash with its flagship store in September 2002. Ferragamo, Cartier, Christian Dior and Gucci also plan to open new stores in coming months.

Are they nuts? Not exactly. Japan's luxury sector may be shrinking slightly-to $10.32 billion this year from $10.75 billion last year, according to estimates from the Yano Research Institute in Tokyo--but it remains among the strongest luxury markets in the world. Retailers are counting on luring Japan's mostly female fashionistas out of staid department stores where their mothers have long shopped. "If you are growing, it means you are taking market share from your competitors," says Prada CEO Patrizio Bertelli, who flew to Tokyo fur the opening. "Now the market will grow in a different way. It may be less rapid, but it will grow."

Deregulation in the retail sector has made branching out of department stores such as Mitsukoshi and Dalmaru easier; cheaper real estate prices in Tokyo have helped, too. In theory, then, luxury retailers can now divide their market segments by age: department store boutiques for mona and free-standing shops in trendy areas for daughter. "Our way of looking at it is that in Japan, the freestanding stores complement the department stores," says Bertelli. But that's not necessarily the way it's been working out. The new competition is "a big problem for department stores," says Sho Kawano, a retail analyst at Goldman Sachs.

Prada is hoping to get a boost from the new-opening hoopla, as Coach and Louis Vuitton did. Prada's net profit in Japan leaped 260 percent in 2002, to $252 million, on a 10 percent increase in sales. Bertelli says sales are on track to reach 10 percent growth in 2003 as well. (Prada reported that first-clay sales of $240,000 at the Epicenter store exceeded expectations.)

How can the poor Japanese afford all these luxury goodies? It turns out that chic $290 sunglasses and $115 key rings bearing the Prada name are must-haves among trendy young Japanese who mostly live with their parents and have large disposable incomes. A survey late last year found that 94 percent of Tokyo women in their 20's own something made by Vuitton. Another 92 percent own Gucci; 58 percent own Prada; 52 percent own Chanel; and 44 percent own Christian Dior. Those are the kinds of numbers that make luxury retailers sit up and take notice.

--Sheridan Prasso