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Japan’s luxury market is set to grow for the first time in four years as status-conscious consumers help rebuild the economy, encouraging expansion by Gianni Versace SpA and Mulberry Group PLC.

Sales of luxury goods here may rise 2 percent in 2011, following a contraction that started in 2007 and wiped 14 percent off the industry’s value, Bain & Co. estimates.

Confidence is returning after the March disasters. As growth resumes, deflation ends and tourists visit from China, Japan is drawing investment from companies including Mulberry, the British maker of ¥485,000 Bayswater bags. Versace returned this year after closing its Japan operations in 2009.

“Consumers are back in stores,” said Claudia D’Arpizio, a Milan-based partner at Bain. “Japan is still a market where you need to be present because it’s a big chunk of the pie and also because the young generation are becoming more and more trendsetters.”

Renewed optimism in Japan, boosted by reconstruction after March 11, and a desire to control distribution is spurring investment. Cavalli Group, the Italian fashion house known for its animal-print clothing, opened its first directly operated store in Tokyo last month.

Mulberry is close to signing a distribution deal in Japan with a joint venture owned by Club 21 and a subsidiary of Isetan Mitsukoshi Holdings Ltd. The 10-year accord anticipates the opening of multiple shop-in-shops within the IMH network as well as new flagship stores in Tokyo and Osaka, Mulberry said at the beginning of October.

Luxury is almost a mass-market business in Japan with a large consumer base that is more value conscious than in other countries, D’Arpizio said. Direct distribution allows companies to control pricing and target customer groups, she said.

Mainstream consumers shelled out 26 percent more on luxury clothes and accessories in the first half, according to American Express Business Insights. By comparison, shoppers that make up the top 5 percent of annual purchases in Japan cut spending by 22 percent in the period, the researcher said Sept. 20.

“I buy whatever I want even right after the March 11” quake, said Kumiko Tominaga, a 42-year-old working at her family’s business who bought a Cartier bracelet for ¥800,000.

Almost 50 percent of all Japanese women over 20 own a Vuitton handbag, MF Global estimates.

Japan’s share of worldwide sales of items like sapphire and diamond necklaces and calf leather handbags retreated to 11 percent in 2010 from 12 percent a year earlier, while demand surged by a third in China, Bain estimates. Japan’s luxury market will reach about ¥1.9 billion, or 10 percent of the total, this year, according to the consultant.

Greater China is set to replace Japan this year as the second-largest market for luxury goods behind the U.S., rising to ¥2.4 billion, according to Bain. Chinese tourism into Japan is helping to boost growth.

“We see Chinese shoppers going to Japan, mainly in Tokyo in the Ginza area,” said Alexis Babeau, deputy chief executive officer of PPR SA’s luxury division. Chinese consumers spent as much as $20.6 billion on luxury goods outside their home market, according to Bain.

Tourists from mainland China “will continue to be a major contributor to retail sales in the Asia region,” HSBC analysts including Erwan Rambourg said in a report this month. “These ‘walking ATMs’ are spreading across the region.”

Worldwide spending on luxury goods may rise 10 percent this year before slowing to a “solid single-digit” percentage increase in 2012, Bain estimates. Global sales reached $238 billion in 2010, according to the consultant.

After more than 20 years of growth fueled by status-seeking and the perceived need to fit in, Japan’s luxury market lost its luster in the last decade. Consumers curbed spending on products as they got older, the young rejected the global brands worn by their parents and prices, which were once as much as three times higher than in Europe, stayed the same or fell.

Japan’s economy may expand 2.5 percent in 2012 after contracting this year, according to estimates compiled by Bloomberg. Unemployment is expected to be 4.4 percent, about half the rate in the U.S. and eurozone.

Even before the earthquake, which forced some luxury companies to close stores in Tokyo for more than 10 days, there were signs that Japanese demand was stabilizing.

Salvatore Ferragamo SpA has said its Japanese sales, which account for 13 percent of the shoemaker’s total, were growing in the first quarter until the earthquake struck. While the disaster caused a “significant” slowdown in sales in March as well as a store closure, revenue growth resumed in the three months through June, the Florence, Italy-based company, said.

Ferragamo’s 1 percent increase in first-half sales in Japan was “better than expected,” Chairman Ferruccio Ferragamo said. “The trend can continue.”

PPR, owner of the Gucci and Bottega Veneta brands, has posted single-digit percentage revenue growth in Japan since May, Chairman and CEO Francois-Henri Pinault said in September. Cie Financiere Richemont SA reported a 7 percent increase in Japanese sales in the five months through August, which is “an encouraging trend seen in the broader luxury sector,” according to Thomas Chauvet, an analyst at Citigroup Inc.

Burberry Group PLC said last week it sees no signs of a slowdown in any markets, echoing PPR and LVMH Moet Hennessy Louis Vuitton SA, the world’s largest maker of luxury goods. LVMH, gets about 9 percent of sales in Japan.

The Tobu department store in Ikebukuro, Tokyo, sold timepieces priced between ¥2 million and ¥3 million during an August promotion that generated sales of more than ¥500 million in a week, according to managing director Keiji Hashimoto. Though that was more than last year’s campaign, “we didn’t see customers who bought a ¥10 million watch,” he said.

Masako Ide was shopping for Louis Vuitton in Ikebukuro after shunning purchases in the weeks after the earthquake and tsunami.

“I’m still very cost-conscious and select luxuries carefully,” said the 52-year-old, who had already bought Gucci and Coach handbags at a discount outlet. “I want to buy more, but it may lead to the bankruptcy of my family.”

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