“There’s been no year when we haven’t seen an increase in turnover.”This is the mystery of Japan in 2001. On paper, the country is in a devastating economic downturn, bringing unprecedented bankruptcies, unemployment, homelessness and deflation. But, to anyone who lived through European recessions, it looks like the opposite of a country fallen on hard times, one of the richest, most expensive and most shopping-hungry nations in the world.Unquestionably, times are harder. A week ago, the unemployment rate rose to just under 5 per cent (or 3.5 million) the highest level recorded. If Japan’s new Prime Minister, Junichiro Koizumi, keeps his promise to reform the economy with an aggressive programme of liberalisation and deregulation, that number will grow by hundreds of thousands.And, as you would expect where people fear for their jobs, consumer spending is down.

Sales in Japan’s famous department stores have been in decline for four years and one famous chain, Sogo, has gone bust. In such an atmosphere of austerity and retrenchment, how can brands such as Herm? Pradas and Louis Vuitton not only survive, but flourish?The answer lies just 20 yards from Hermes, in a loud and decidedly inelegant shop that opens on to the busy street. This is Matsumoto Kiyoshi, part of a chain of discount stores selling toiletries, cosmetics and drugs. Such discount shops were unknown 10 years ago, but recently they have emerged in various sectors, offering decent quality, low prices and frills.Uniqlo, a cut-price Japanese imitation of Gap, has enjoyed staggering success with its simple, attractive £2 T-shirts and £15 pairs of trousers (the company is opening in Britain in the autumn) Restaurant chains have also been engaged in a price war, most notably McDonald’s, which now charges just 65 yen (38p) for its cheapest lunchtime hamburger.By saving money at the bottom end, Japanese shoppers are still able to treat themselves at the top. As Professor Heizo Takenaka, Japan’s Economic Minister, said: “An intelligent consumer today can enjoy both expensive and cheap goods and services, such as expensive Japanese food in a restuarant in Kyoto and cheap burgers at McDonald’s.”One shopper, 19-year old Sachiko Takanashi, was in Matsumoto Kiyoshi, carefully selecting a 500 yen (£2.90) can of hairspray “I always come here,” she says. “In the other shops this would cost 300 yen (£1.75) more.” But despite this conscientiousness, it would be hard to call Ms Takanashi a thrifty shopper. She wears a £2,350 Rolex and carries a red Louis Vuitton bag that cost £935 “I’ve got five others at home,” she says “All Louis Vuitton.” She has paid for them herself.

She lives with her parents, and earns good money working in a nearby bar. She is also saving to go to university next year.The Tachibanas, a couple in their fifties, emerge from Herm? Mr Tachibana took voluntary redundacy last year from his construction firm “I’ll have to start looking for another job soon,” he says. “And I’m very pessimistic.” His wife, Etsuko, is economising on food by travelling further than usual to discount supermarkets. But today, they have splashed out a little, on an exquisite, slim £1,000 watch.