Akiko Sayama re-examined her spending habits when the Tokyo staffing agency where she works cut its overtime budget. She lost around ¥1 million in annual pay, so one of the first things she did was curb her tastes for Louis Vuitton and Gucci.

"I need to cut back where I can," said Sayama, 41, who lives in Saitama Prefecture. "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 the economy to contract 5.7 percent this year, according to the median estimate of 17 economists. Luxury spending could fall 14 percent to ¥2.5 trillion this year from a peak of ¥3 trillion in 2005 and 2006, Boston-based consultant Bain & Co. said.