Japan's trend-chasing office workers and ladies who lunch are giving up Louis Vuitton handbags and Chanel jackets for Zara dresses and Gap jeans, making what was a favourite market for luxury manufacturers into one of their biggest headaches.
The downturn is forcing customers in Japan to scale back purchases of luxury goods, accelerating a long-term shift in consumer attitudes, according to a report by McKinsey, the consultants.
"This is not a blip. This is a long-term shift in the market," said Brian Salsberg, the author of a McKinsey report on the Japanese luxury goods market, the world's second largest.
Sales of imported luxury goods suffered a 10 per cent drop last year to Y1,064bn ($11.1bn), according to a study published on Tuesday by Yano Research, a Japanese market research group.
Yano Research forecast that the market would shrink further this year, falling below Y1,000bn to nearly half the peak of Y1,897bn in 1996 and then shrinking to levels last seen 20 years ago before it entered its era of strong growth.
LVMH, the group with brands ranging from Moët to Louis Vuitton, reported an 18 per cent drop in sales in Japan in yen terms in the first quarter.
While luxury sales throughout the world are being hit by the recession, Mr Salsberg said that the implications of the latest slump for Japan were likely to be more serious and long-lasting.
Japan became the world's "only mass luxury market" in the 1980s and early 1990s, when Japanese consumers saw ownership of a Louis Vuitton bag or Hermes scarf as a middle-class rite of passage.
But the growing confidence of shoppers in mixing and matching cheap and expensive products, coupled with competition from a growing array of luxury services such as spas and expensive restaurants, have robbed the brands of their hold on such spending.
Mr Salsberg said the brand makers, which created "a luxury bubble" with "a ridiculous number of store build-outs", bore some blame for their predicament. He warned that they risked repeating the mistake in China.
China was the "growth story" for luxury but if makers flooded the market with stores as in Japan and people were able to buy such goods on every street corner, "the industry is going to destroy itself" there, he said.
Copyright The Financial Times Limited 2009