Cheap, isn’t it?” one young female shopper remarked to her friend on a recent Wednesday afternoon in Tokyo as she brushed past racks of oversize sweatshirts on sale for 1,999 yen, or $21 at current exchange, at youth-oriented shopping center Shibuya 109.

She and scores of other consumers in Japan’s recession are becoming more price- and value-conscious than ever, shunning luxury labels and traditional department stores in favor of cheaper but equally trendy alternatives like Uniqlo and Hennes & Mauritz, or opting to curtail their fashion spending altogether as they worry about the economy and job security.

“Now consumers are keeping their wallets shut tight and have the time to consider very carefully the products they need,” said Andrea Fenaroli, president of Furla Japan, which is keeping the average retail price of its handbags at 54,000 yen, or about $576. “It’s necessary to fill their needs by providing something novel and creative.”

It’s a challenge to distract consumers from near constant news of discouraging economic data. Japan, which officially entered a recession in November, saw its GDP shrink 3.3 percent in the last quarter of 2008—its biggest drop since 1974. The world’s second-largest economy is struggling to cope with declining demand for its key exports like cars and electronics. Blue chips such as NEC, Sony, Pioneer, Nissan and Panasonic have announced plans to slash tens of thousands of jobs. Unemployment was 4.4 percent in December, a sharp increase from 3.9 percent a month earlier.

Late last year, Louis Vuitton scrapped plans for a new 10-story flagship in Ginza, sending yet another negative signal to an already flagging luxury goods market. Parent company LVMH Moët Hennessy Louis Vuitton saw sales in Japan fall 10 percent in 2008 in yen terms, deteriorating from the 6 percent decline posted in the first six months of the year. Rival PPR’s Gucci Group luxury division reported a 3 percent drop in Japan revenue in 2008.

Coach Japan president and chief executive Victor Luis said he’s detected a drop-off in weekend traffic as customers reduce trips to stores and spend more time window shopping before making a purchase. “We do not see a rebound in the near term. While the total market for imported handbags and accessories has not grown for over five years, it decreased this past year and especially in the last six months,” he said. “All signs indicate that consumer confidence will take time to rebound.”

Nevertheless, he said Coach has outperformed the rest of the market, thanks to its competitive pricing strategy. Coach Japan’s sales in the most recent quarter ended Dec. 27 were down only 1 percent.

Traditional retail formats are some of the biggest losers in the current climate. Japanese department stores saw their January same-store sales slump 9.1 percent, registering their 11th consecutive month of decline. Smaller specialty retailers have also taken a hit, and the number of empty storefronts in areas like trendy Jingumae, near Omotesando Avenue, has grown over the past few months.

Last month, Deutsche Bank initiated coverage of leading department store operators Isetan Mitsukoshi, Takashimaya and J. Front Retailing and warned that the retailers are heading into a “prolonged and unprecedented sales downturn.” Department stores’ sales have been waning for more than a decade, however, owing to Japan’s declining population, as well as competition from other retail formats, like shopping centers and luxury brand flagships. The current economic situation risks cutting even more into traditional retailers’ business, the bank said.