Nov. 6 (Bloomberg) -- Akiko Sayama re-examined her spending habits when the Tokyo staffing agency where she works cut its overtime budget. She lost more than $13,000 in annual pay, so one of the first things she did was curb her tastes for Louis Vuitton and PPR SA’s Gucci.

“I need to cut back where I can,” said Sayama, 41, who lives in Saitama prefecture outside of Tokyo. “It’s not like I lost my interest in luxury brands. I can’t afford them.”

Sayama is embracing a frugality that, along with a shrinking population and falling wages, is causing Japan’s economy to contract by 5.7 percent this year, according to the median estimate of 17 economists compiled by Bloomberg. Luxury spending in the country could fall 14 percent to 19 billion euros ($28.1 billion) this year from a peak of 22 billion euros in 2005 and 2006, Boston-based consultant Bain & Co. said.

The worldwide luxury market is expected to shrink 8 percent to 153 billion euros this year, including a 16 percent decline in the Americas and an 8 percent drop in Europe. Yet spending in China, the world’s most populous country, may grow 12 percent to 6.6 billion euros this year, compared with 5.9 billion euros last year, Bain said Oct. 19.

“Given the pace of economic growth, luxury-goods makers are starting to give up on Tokyo, as they shift their focus to other Asian markets like China and Singapore,” said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo.

“The situation will remain severe here because more people are losing their interests in brands with the advent of cheaper, fast fashions.”

Giving Up on Tokyo

Tokyo housewife Masako Shikano, 46, said she stopped buying clothes by Michel Klein, a Paris-based designer, in favor of Fast Retailing Co.’s Uniqlo. Michel Klein offers a fake leather jacket for 19,950 yen ($220), while Uniqlo’s synthetic leather jacket sells for about 5,990 yen.

“Uniqlo has a good design,” Shikano said. “It looks good on me, even though it’s cheap.”

LVMH Moet Hennessy Louis Vuitton SA, the largest luxury- goods maker, last year scrapped its plan for a Vuitton flagship store in Ginza, one of Tokyo’s busiest shopping districts. Gap Inc., the largest U.S. clothing retailer, took over the space.

Gianni Versace SpA said in October it will withdraw from Japan and review its entire business strategy. Versace Japan had sales of 1.6 billion yen in 2008 compared with 4.1 billion yen four years ago, according to Teikoku Data Bank Ltd., a Tokyo- based credit researcher.

“The Versace boutiques in Japan no longer represented the brand image and it was felt to be more advantageous for the company to close them and start with a clean slate,” the Milan- based company said Oct. 7.

‘Suffers a Lot’

Hermes International SCA today said third-quarter sales in Japan fell 0.9 percent while surging 37 percent in the rest of Asia. Japan, Hermes’ biggest market,“suffers a lot,” Chief Executive Officer Patrick Thomas said today on BMF radio.

Gucci sales in Japan dropped 20 percent in the third quarter of the year, according to Jean-Francois Palus, PPR’s chief financial officer.

Bain estimated that 15 percent of the 300 luxury stores expected to open this year will be in mainland China, with another 25 percent opening elsewhere in Asia. Bulgari SpA Chief Executive Officer Francesco Trapani said Oct. 9 that sales at the world’s third-largest jeweler improved in the second half, particularly in China. Asia is its biggest market.

Japan has the highest proportion of people over 65 and the lowest of those under 15. Wages fell for the 16th straight month in September, the government said Nov. 2.

Uniqlo, H&M

Winter bonuses among Japan’s largest companies will fall 15.9 percent to 747,282 yen in 2009, the biggest drop since the survey began in 1959, the Japan Business Federation said Oct. 29. Companies typically pay the bonus in December.

Casual-clothing chains including Uniqlo and H&M are increasing their presence. Fast Retailing opened its biggest store in Nagoya City in October. The company has about 780 domestic outlets.

Hennes & Mauritz AB, operator of H&M shops, opened three stores in September around Tokyo. Its sixth outlet opens in Tokyo this month.

Los Angeles-based Forever 21 Inc., which sells casual dresses, opened its first shop in Tokyo in April. Abercrombie & Fitch Co., the U.S. retailer specializing in clothes for teens, opens its first Asia store in Tokyo in December.

Casual and Thrifty

J. Front Retailing Co., Japan’s second-largest department store operator, wants to reduce reliance on luxury goods at its Daimaru and Matsuzakaya department stores after profits dropped 31 percent in the first half of this year from a year earlier. The company must expand its low- and mid-priced merchandise to attract younger consumers, Chief Executive Officer Tsutomu Okuda said Oct. 13.

“The number of rational and smart consumers is increasing rapidly, and they’re becoming more casual and thrifty, eager to find value for what they spend,” he said.

The Esperanza casual shoe brand is opening an outlet next month inside Daimaru’s Osaka Shinsaibashi store, selling short boots and pumps for about $50.

Not everyone is shopping downmarket to save money. The economy is signaling a recovery from its deepest post-war recession, with industrial production rising for a seventh month and the jobless rate falling for a second month in September. Japan is the second-biggest luxury market, trailing the U.S., according to consultant McKinsey & Co.

“I would buy Louis Vuitton if I find something I really like, and it doesn’t matter how much it costs,” said Kyoko Hoshi, 55, a housewife.

Vuitton’s Strategy

Louis Vuitton is trying something new in the Ikebukuro train station near ticket gates for East Japan Railway Co., Japan’s biggest railway operator, and Tokyo Metro Co., a subway operator.

The underground store will remain until late 2010, then move to the Seibu Department Store, a unit of Seven & I Holdings Co., in the same complex. Unlike other Louis Vuitton stores, it resembles a construction site with signs written in yellow letters on a cement-like floor and Monogram and Graffiti bags displayed on wooden crates.

“Foreign luxury goods companies need to think about what innovations are needed to really suit the Japanese market, instead of simply flogging what they already have,” said Yuwa Hedrick-Wong, a Singapore-based economic adviser at MasterCard Worldwide.

Sayama said she last bought a Louis Vuitton wallet in January because her old one was falling apart. Now she shops for less expensive items.

“I don’t have much money to spare anymore,” she said over an 800-yen ($9) plate of pasta at an Italian restaurant in Tokyo. “After all, luxury products are something I can live without.”

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net.

Last Updated: November 6, 2009 06:54 EST