Japan is transforming into a 'type of aged society never experienced before', according to a government white paper issued last year. With one-fifth of its 128 million people aged 65 or over, the nation has the largest percentage of seniors on the planet. By the middle of the century, when the average life expectancy for Japanese men is expected to reach 86, and 90 for women, fully one-third of the population will be pensioners.

That inverted population pyramid is already straining Japan's welfare system. But some are finding opportunities amid the nation's worst economic crisis since the second world war. According to the government, the average senior couple has more than 24 million yen (HK$1.8 million) in savings and average monthly spending per household peaks in the 60 to 69 age bracket. Many businesses want a slice of the so-called silver market.

Sugamo is the retail cutting edge of this phenomenon. The 1km main shopping street, Jizo-dori, boasts 10 chemists, half a dozen or more outlets selling walking aids, funeral parlours and a karaoke bar where the song list stops in the 1970s.

Red underwear, a traditional gift for those over 60 as it's reputed to ward off sickness, hangs outside many shops, like the street's unofficial flag. Unlike many of its more garish neighbours around the city, there are few fast-food restaurants or flashing neon signs to strain tired old retinas.

'People come here from miles away, even from the countryside,' says Mariko Saito, the owner of Songs from the Old Days. Inside the bar, scenes from old samurai dramas flicker on the karaoke screen as Yanagida entertains a handful of elderly customers. The bar is a well-known haunt for pensioners. 'It's hopping at the weekends,' says Saito. 'Sometimes old folk who are completely blind come in with members of their family to read the lyrics for them.'

Sugamo's spiritual heart is the 400-year-old Koganji Buddhist temple, home of the Togenuki statue, which has a reputation for healing the sick.

'Of course, most people don't believe that coming here will make them better. But it can't do any harm,' says Michiko Morioka, 79, who suns herself in the temple's grounds, crowded with elderly people discussing back and joint pain. 'We come to talk and shop.'

As the temple grew in popularity among the old, businesses sprang up or adapted to cater to them, says Hiroshi Shimichi, owner of a furniture store on the main street.

'They were coming in and asking for walking aids,' he says. 'So I began to stock them about a year ago. So far, sales haven't been harmed by the recession.'

Sugamo is one harbinger of what some observers believe could be a major consumer shift as businesses retool to cater to a demographic they have largely neglected.

'A lot of companies were unsure or even afraid of how to deal with older people,' says Florian Kohlbacher, author of The Silver Market Phenomenon: Business Opportunities in an Era of Demographic Change. 'They think it will have a negative impact on their image, but this is changing.'

Although still underdeveloped, the market is promising, Kohlbacher says. 'Japanese firms were among the first to react to the challenge of the demographic change and are constantly coming up with products and innovative services.'

Examples abound. Kyoto-based underwear maker Wacoal has studied more than 40,000 human bodies to determine how the body changes over time and develop the perfect fit for the elderly, says Kohlbacher. Carmaker Nissan is trying to develop a vehicle for the elderly that will respond more sharply to dulled driving instincts. Telecoms giant NTT has developed phones with easy-to-read keys and functions.

Those over 55 are among the fastest-rising group of new customers in Japan for fitness clubs, dating agencies and holiday outings. Even Tokyo Disneyland is trying to lure some of that grey yen.

The changes are more remarkable because before the 1990s, Japan's elderly demographic was average in size - until its huge strides in diet and health care began to kick in. Longer life expectancy coupled with the plummeting birth rate have forced a rethink for many companies, even those catering to market niches once considered unthinkable for the elderly - such as adult entertainment and sex.

Several firms have launched product lines dubbed 'elderly porn', an increasingly popular genre with its own star: 75-year-old Shigeo Tokuda. A veteran of 350 films, Tokuda entered the industry late in life after decades in the tourism industry. He told a Japanese magazine last year that his success and his ambition to keep working until his 80s were a sign of the times. 'I think as Japan ages, people like me will become more important because we show that we can still have rich lives.'

In Tokyo, Osaka and other big cities, some firms now operate outcall prostitution services for pensioners and the immobile. Known euphemistically as 'delivery-health', the services charge between 22,000 and 54,000 yen for sessions ranging from 70 minutes to three hours, and include optional services such as pickups for wheelchair-bound customers in 'barrier-free' people carriers from home to hotel.

The ageing phenomenon has its dark side. For those who can't afford the cost of buying into the silver consumer market, prospects are bleak: life on meagre and shrinking welfare benefits.

In recent years authorities have noticed crime rates rising among those over 60. Robbery, assault and murder by pensioners are on the rise amid what the media has dubbed a 'grey crime wave'. The percentage of those over 65 in prison has tripled in a decade and exceeds 12 per cent of the total prison population - four times the figure in Britain.

Japan has the highest rate of incarceration for pensioners in the industrialised world and a custom-designed prison - Onomichi in Hiroshima, which is equipped with handrails, pushcarts and walking aids. The inmates include a pensioner who beat up his care worker after he threatened to resign and an elderly married couple who held up a convenience store. The eldest inmate is 89.

As the slump deepens, the problem of elderly crime is likely to worsen. But businesses and government hope the future resembles Sugamo more than Onomichi. With cash in their pockets, the generation who built post-war Japan into an economic superpower can chat, shop and even check in at love hotels. And, of course, there is always singing.

'Sometimes I get lonely and think I've been forgotten about,' says Yanagida, whose husband died 27 years ago. 'Here I feel like I'm part of the world again,' she says, before returning for her fourth stint at the karaoke machine.