Japan Inc. is confronting a ticking demographic time bomb, and private equity players are racing to defuse it. Across the country, ageing business owners are facing a dual reckoning: heirs not interested in taking over the family business, and steep inheritance taxes. For many family businesses, rooted in the tradition of handing over the reins to the next generation, a once-taboo option is fast becoming a viable alternative: selling to private equity. According to Bain & Co., Japan’s private equity market has now topped 3 trillion yen ($20 billion) in annual deal value for four consecutive years. On a year-to-date basis, deal activity in Japan has jumped over 30% to $29.19 billion year on year, data from PitchBook shows. Much of this deal flow is being driven by a massive wave of family-owned businesses putting themselves on the bloc, as aging founders face succession challenges and heavy inheritance taxes, according to industry experts. Jun Tsusaka, CEO of Japanese investment firm Nippon Sangyo Suishin Kiko, cites the example of a 61-year-old who recently tasked Tsusaka to sell his business. “They’re at an age where they’re saying: ‘I’ve worked hard. But my children do not want to take over my business,'” he said. They’re at an age where they’re saying: ‘I’ve worked hard. But my children do not want to take over my business.’ CEO of NSSK Jun Tsusaka Japan levies the world’s steepest inheritance taxes , going as high as 55% on large estates, according to Tax Foundation. That high tax puts even the heirs in a bind. The tax bill must be settled within 10 months of death, often compelling heirs of privately held companies to offload the assets fast to raise cash, making selling to private equity an increasingly attractive option. Over 90% of Japanese small and medium enterprises are family-owned, and more than 65% of Japan’s buyout deals now stem from succession cases, according to data provided by investment management firm Neuberger Berman. By 2025, about 1.27 million SME owners aged 70 or older will have no successor — about one-third of all Japanese companies, according to a World Economic Forum report . Kyle Walters, a private equity analyst at PitchBook, said succession was a powerful domestic driver for deal flow. “The lack of succession and Japan’s aging population are undoubtedly critical factors for the growth of PE activity in the country,” he told CNBC. “Many sellers are looking at PE as a real possibility because there are few other options.” Ten years ago, selling to foreign funds was unthinkable. Traditionally, CEOs did not see selling out as an option, said Manoj Purush, Reed Smith’s corporate partner specializing in mergers and acquisitions. “Then it turned into: okay, we can consider selling because we need investors — but those investors were local. Then they realized actually, we can start considering foreign investors.” That cultural shift has given global players legitimacy, as successful turnarounds by foreign behemoths like KKR, Carlyle and Bain eased fears that PE would gut companies, he added. For example, KKR bought an 80% stake in Panasonic in 2013 , renamed it to PHC Holdings, which then went public in 2021. “They’ve seen foreigners come in, and it has worked,” said Purush. That cultural shift, has even driven some younger founders to sell amid chronic labor shortages and the inability to attract professional management — a trend intensified by the “Employment Ice Age” generation gap, said Ryo Ohira, Neuberger Berman’s head of East Asia. The “Employment Ice Age” refers to the period between early 1990s and early 2000s when Japan’s job market entered a deep slump, following the collapse of an economic bubble, hollowing out the mid-career talent pool. That shortage of seasoned professionals has left SMEs with few viable successors or external managers, deepening today’s succession and leadership crisis. Other PE tailwinds The Japanese government’s regulatory reforms have also aided its private equity boom, said Jim Verbeeten, a partner at Bain & Co. “If you explain why it’s all so great today, it goes back to 2015–16,” he said. The government had introduced sweeping reforms: mandatory external directors and pressure from the Tokyo Stock Exchange to improve return on equity. Beyond succession, corporate carve-outs are fueling deals as Japanese conglomerates, under regulatory pressure, strive to free up capital and boost return on equity. Activist investors have also been pushing underperforming boards to divest assets or go private, according to industry veterans. Macro factors also play a part. Weakness in the yen makes Japanese assets relatively cheaper, especially for dollar-holding investors, said Neuberger Berman’s Ohira, adding that global PE Limited Partners — private equity fund investors — are demanding Japan exposure, and General Partners — the people or firms managing private equity funds — are scaling and deploying funds to meet that demand. Pitchbook’s Walters added that Japan’s interest rates stay significantly lower than other major developed markets, which makes leveraged buyouts in the country attractive. The yen has weakened almost 4% against the greenback since the start of the year, and is currently at 150.93 per dollar. Overheating risks? With capital flooding in, some experts are cautioning about market overheating. “If things are really attractive, everyone wants to take part … More money chases the same market, and some people start paying more. The cautionary tale is that the 2006–07 vintages in Japan were not that good,” Verbeeten warned, alluding to the private equity boom in Japan. In 2006–07 fundraising and deployment cycles, firms rushed to put money to work and paid increasingly high prices, stretching valuations. Many of those investments underperformed as the 2008 financial crisis unfolded — the deals made during those years are now labeled “weak vintages,” experts told CNBC. Despite the current PE boom in Japan, PE investment currently accounts for about just 0.4% of Japan’s GDP , compared with 1.3% in the U.S. and 1.9% in Europe. “Front runner in excitement, yes. But from sophistication? Japan is still a growth market,” said Verbeeten. Succession worries mean that Japan is likely to remain a growth market, and a fertile ground for PE firms hunting for bargain deals.