Walking out into the Daikanyama sunshine, Chuto is freshly coiffed after spending three hours and over ¥10,000 (€90) at the salon of one of Tokyo’s most sought-after hairdressers. Chuto’s looking sharp in cargo pants and a checked shirt. One detail – Chuto is only a foot tall. And he’s a Yorkshire terrier. In fact he’s one of the world’s luckiest canines. Every animal should be so fortunate as to be a pet dog in Japan, where dogs are doted on like nowhere else. It’s a luxurious world of tiny jeans and big hair, ayurvedic beauty treatments and organic food.

Hilarity over bouffant hairdos and diminutive fashions aside, dogs are big business in Japan. Between the food, clothes, salons, hotels and hospitals the Japanese are spending up to ¥600bn (€5.4bn) a year on their dogs. There are almost as many dogs as children, nearly 12 million at the last count. Walk down Omotesando and the streets are teeming with pert chihuahuas and miniature schnauzers dressed to the nines and lounging in dog buggies.

“People in other countries love their dogs too,” says Yuki Wada. “But what’s unusual here is the amount of money owners spend on goods for their dogs.” Wada is regional manager for Creative Yoko, which has 20 per cent of Japan’s dog apparel market and annual sales of ¥7bn (€63.8m). The original Yoko, a Mrs Ito from Osaka, started a gift shop in the 1980s, turned to dog goods in the 1990s and by 2009 had sold the business to fashion giant Onward (owners of among others, the Joseph brand) for over ¥8bn (€72.9m). Yoko is now enjoying a comfortable retirement, dividing her time between Japan and Hawaii.

According to the Japan Kennel Club, the most popular breeds in Japan last year were, in order, toy poodles, chihuahuas, dachshunds, pomeranians and Yorkshire terriers. All small dogs and all ripe for grooming, dressing up and being carted around in a wheeled vehicle. The typical urban dog’s small stature, their status as a member of the family and the tendency to keep them indoors dictates the direction of a vast industry in everything from teeny canine nappies to health foods and supplements.

At Hannari, Creative Yoko’s premium shop brand, the shelves are lined with dresses, jeans and hooded tops that go down to as little as a 5s size, too small for anything but the tiniest teacup Yorkie. There are uv tops for the summer, waterproof jackets and customised leads. One of their current top sellers is a cream chino, striped shirt and braces all-in-one from the preppy US brand J Press (bow tie optional).

The company also holds lucrative licences to make dog wear with characters from Disney and Snoopy, which it sells through its shops called Pet Paradise. Its latest venture is a store in a revamped motorway service station in Shizuoka next to a dog-friendly café.

Wada says that although the company has been showing steady growth of around 5 per cent annually, the overall market in Japan is almost at saturation point after peaking in 2009. Until then growth was running at 7 per cent – last year it was less than 1 per cent. The industry was affected by events in Japan last year (and the subsequent belt-tightening) and everyone is looking for new avenues. Kazumi Yanagisawa from the Yano Research Institute says that while the total pet market has hit its peak, “products with key words such as ‘miniaturisation’, ‘keeping in the house’, ‘ageing’ and ‘obesity’ are all increasing”. The other option is finding fresh markets. Persuading China’s new middle class that dog fashion is the way forward could send the Japanese market into overdrive.

Creative Yoko has 50 dog shops, mostly in Japan, with stores in Hong Kong, Taiwan, Shanghai and New York. It also sells to wholesalers in South Korea and it’s about to open a new store in Beijing. “We see China as the big growth area,” she says. “When we hold events, like fashion shows we’re seeing more and more interest.” There are some cultural differences between the markets though. “Japanese owners prefer smaller dogs and tend to keep them inside,” she says. “And the Chinese don’t put clothes on their dogs so much yet.” Wada says that Taiwan, which is inclined to look towards Japan in matters of fashion and design, is the most receptive market so far. One small problem, which every luxury label encounters, is the prevalence of fakes and factory rejects on sale in the black market. “We see our products on sale at the night market in Taipei,” she says. “We send a letter of warning but another place pops up and it just goes on and on.”

Salons are a key part of the industry. There are nearly 9,000 pet salons in Japan doing everything from an old-school trim and fluffy blow out to avant-garde styling. Chuto was in the hands of Ryo Kikuchi, dog hairdressing’s Warren Beatty. Kikuchi trained as a human hair stylist, started trimming his own dogs and is now one of the best-known coiffeurs in the canine grooming world with a signature hat and a three-month waiting list. “I realised I had a skill that conventional groomers don’t have – talking to the customers,” he says. Years of chatting to clients stood him in good stead as he took on the grooming world and pushed dog styling in a more fashion forward direction. Word of Kikuchi’s magic way with the scissors has spread beyond Japan. He spent six months of last year travelling to and from Beijing to train up stylists at a new salon there.

The pet food industry is another money spinner. According to Yano Institute, the dog food industry in Japan was worth ¥149bn (€1.3bn) in 2010 and these days, the niche industry is premium dog food. Kazuyoshi Endo is a “holistic care counsellor” at the new Green Dog centre in Daikanyama, which combines a salon, shop, hospital and hotel. “Ten years ago people didn’t care so much about preservatives in dog food,” he says, “but their awareness has changed.” The days of opening a can of Chum are over. Endo guides customers around the displays of disconcertingly human-looking food and a classy range of herbal supplements.

Alongside the hormone-free kangaroo and ostrich jerky there are organic herbs, dog fusilli and freeze-dried natto. A fridge contains ready-made meals worthy of a busy bachelor – chicken cream stew, pot-au-feu and Italian penne. Over by the salon where treatments range from standard grooming to micro bubble baths and herbal skin packs, there are dog toiletries, everything from softening paw balms to shampoos made from hot spring salts. Outside in the members-only dog run two well dressed but highly strung chihuahuas are looking nervously at an unusually large mixed breed. “We didn’t expect the dog run to be so popular,” says Endo.

The hotel has proved similarly popular with the lunching set who want to eat, shop and leave their dogs alone for a couple of hours. An overnight stay in the smallest kennel on a weekday is a cool ¥10,000 (€90) – and there is no shortage of takers. The animal hospital has all the gloss of private healthcare and there are two vets on call. Not bad for a company that started out in 2000 in web sales. “The number of dogs might have peaked,” says Endo. “But the premium market is still growing.”

Dog-friendly cafés are standard fare in chichi residential neighbourhoods but Yuki Minamimura took the idea to a new level 12 years ago with her food business Kitchen Dog! She started out cooking for her own dog, began selling to friends and eventually opened her own dog deli. Regulars come into the Aoyama shop to buy fresh dog meals such as cod and egg soup, sardine omrice, horsemeat burgers or order birthday cakes that look convincingly realistic but contain little more than flour, canola oil, eggs and Caspian yoghurt masquerading as whipped cream. “I wish people would feed their dogs properly rather than spend on clothes,” she says. Minamimura has written three top-selling recipe books and her Perfect 50 Recipes for dogs is now in its fourth reprint. Business was challenging after the earthquake last year, but it’s rebounded. Last Christmas was her best ever. “I’m noticing that people are being more careful with their money these days,” she says, “but when it comes to special occasions they spend a lot.”

It’s easy to assume that there must be some correlation between the decline in Japan’s birth rate and the corresponding boom in small dogs in prams. Professor Masahiro Yamada of Chuo University, a sociologist who has been looking at attitudes to family and marriage for years, says that the affection and money lavished on dogs in Japan is about more than finding surrogate children. “I think dog owners want to feel that they can be trusted by their dogs, that they are needed by them,” he says. “It’s not only single women and couples without children who keep dogs but many married couples too.”

Dogs, it seems, are a good distraction in a lacklustre relationship. “Japanese couples don’t confront each other when they have problems and don’t get divorced easily. Instead, they stay together raising children or having pets,” he says. It’s not just young couples either. “Many couples whose children are grown up become pet owners. Even grandparents who want to take care of their grandchildren but don’t live with them or feel they can’t interfere with modern parents. They keep pets to feel they are needed.”

The industry is evolving to accommodate demographic changes. Hiroyuki Inami a chief consultant at the Nomura Research Institute says that as Japanese society lives longer, so will its dogs. The young pups, who are now sporting dungarees and wraparound shades will be getting on and a whole other industry is developing to cater to them. “Small-sized dogs are overwhelmingly popular in Japan,” he says. “And the tendency is to keep dogs inside so we’re expecting the nursing care market to grow.” People might be buying fewer dogs in the future but that doesn’t mean there isn’t scope for new business. Analysts believe the next growth areas will be insurance, hotels and funeral services.