(FORTUNE Magazine) – On the night before Louis Vuitton opened its new boutique in Tokyo this month, chairman Yves Carcelle guided visitors on a giddy tour. Past customers already queuing at the front door, past the dancing mannequins, past the Luggage Lounge and Bag Bar, he led the way to a small, vaultlike room at the top of a polished staircase. Standing before a wall of steel compartments resembling safety-deposit boxes, he grinned and flung open the drawers, revealing an exquisite watch, a sparkling ring, a jewel-encrusted bracelet.

"Just like a bank, no?" he said, laughing.

Well, not exactly. Unlike your average Japanese bank, Louis Vuitton actually makes money here. Great big designer trunkloads of it, in fact. So do Hermes, Gucci, Burberry, Versace, Chanel, and Rolex, all of which have opened lavish boutiques in Tokyo over the past three years. Prada last year opened no fewer than five outlets in Japan. Its new, six-story flagship in Tokyo's Aoyama district--resembling a translucent Prada bag--cost $85 million, Italy's largest-ever investment in this country.

It is one of the great koans of the global marketplace: Thirteen years after the "bubble economy" burst, Japan's jobless rate hovers near an all-time high, stocks languish, and bankruptcies rage--but shoppers still can't get enough $4,000 handbags and $1,500 shoes. The European fashion industry is counting on shoppers in the industrial world's sickest economy to keep it afloat.

Europe's big luxury labels rang up record Japan sales in 2002 even as growth in their other markets faltered. At Bulgari, watch sales climbed 28% in Japan, compared with 9% globally. Prada's Japan earnings tripled to $3.3 million, while worldwide profit tumbled 45%. Louis Vuitton's 46 Japanese outlets rang up a record $1.4 billion in sales last year, accounting for more than a third of the company's worldwide revenue. Merrill Lynch analyst Antoine Colonna estimates that Europe's dozen largest fashion houses now depend on Japanese consumers--including the swarms of Japanese tourists who descend on boutiques in Paris, Honolulu, and Milan--for one of every three dollars in worldwide sales.

It all seems to defy the logic of both economics and sociology. The wares of "exclusive" European fashion houses are now so commonplace that Japan can be said to have evolved into the world's first mass market for luxury. For Japanese of even ordinary means, owning three or four expensive designer bags is de rigueur (one for work, one for shopping, more for travel). A recent survey by Japan's Saison Research Institute found that more than half of Japanese women in their 20s own a Louis Vuitton bag, while an astonishing nine in ten claimed to own at least one Louis Vuitton item. And yet despite their ubiquity, top brands seems to have lost little of their cachet. Last September, when Louis Vuitton opened the doors to its 13,000-square-foot Omoterando flagship store--the largest Louis Vuitton outlet in the world--the line of customers stretched nearly two miles.

Some attribute the luxury boom to "parasite singles"--unmarried Japanese who live with parents well into adulthood. Sociologist Masahiro Yamada, who coined the term, estimates that more than ten million Japanese in their 20s and 30s have parents covering room and board, leaving them free to spend what they earn on travel, food, and accessories.

Colonna, who figures "parasites" account for about 40% of Japan's luxury-goods sales, sees a wave of hedonism tinged with despair. Younger Japanese, he theorizes, are living it up, splurging on costly merchandise because they have no faith in the future.

Masanobu Sugasuke, editor of Invitation, Tokyo's smartest lifestyle magazine, says hard times make consumers long to own "at least one thing that is truly extravagant." With incomes stagnant, Japanese are spending more on $800 scarves and $6,000 watches and less on housing and food. While McDonald's has been forced to slash prices repeatedly here, in August Louis Vuitton raised its prices by 5.5%.

Marketing consultant Futaba Miyake theorizes that European brands are now so common that they have become totems of survival. Mothers wouldn't dare come logo-less to fetch children at the kindergarten in their affluent neighborhood, she jokes, lest they invite gossip that their husbands have been laid off.

And perhaps the endless slump has simply driven some folks mad. At Tokyo sales counters, the parasites and paranoids slug it out with a subculture of hard-core Dior Addicts, Prada-holics, and Louie Loonies. A Japanese television report on "brand binging" featured five women with closets jammed full of merchandise--much of it unused--from Cartier, Burberry, and Vuitton. Tales of women who pile up huge debts on luxury items and then fall prey to loan sharks have become a staple of the press.

"Azami," a 40-year-old Kobe photographer whose website catalogs her collection of more than 100 Louis Vuitton bags (but who would be interviewed only if identified by her Internet alias), says it's simply a matter of good taste. "There are thousands of Japanese just like me who buy Louis Vuitton because of quality," she insists. "I need every item I own."

How much longer can it last? Kensuke Kojima, a fashion industry consultant, foresees a shakeout. In the first three months of 2003, he notes, sales slid for all but seven of the top 27 luxury brands. Louis Vuitton, Coach, perhaps Dolce & Gabana will continue to prosper, he says, but the rest "are going to get clobbered."

"So typical," scoffs Prada CEO Patrizio Bertelli, gazing down on shoppers from a window of his new Aoyama store. "That's exactly what everyone used to say about Vuitton."

As for Vuitton's Carcelle, the naysayers have him wringing his hands--all the way to the new boutique's bank vault. "I think it's a mystery for everyone," he shrugs, when pressed to account for Japan's seemingly insatiable appetite for luxury products. "The truth is, I don't even want to try to understand."