Until recently, Daimon seemed just another example of Japan's corporate woes: a wholesale liquor group listed on the OTC market, it was struggling to carve out a viable business in the Yokohama area.

But this autumn, the company has become an encouraging example of financial change. Unison, a private equity group established by a former Goldman Sachs official, recently launched a bid to purchase all of Daimon's shares, in what appears to be one of the first quasi-leveraged buy-outs of a listed company in Japan.

The deal is striking because until recently the very concept of LBOs was unknown in Japan.

The critical question now is just how many more examples like Daimon will actually emerge in Japan? In theory the private equity market in general - and LBO in particular - looks as if it should be ripe for rapid expansion.

The country has a large pool of distressed companies, which are in precarious financial health. And though some of these are in hopeless niches, or have outdated business models, many others retain strong products and potential - if they could only shake off excessive levels of debt due to the asset price collapse of the last decade.

Furthermore, there is a strong recognition by the government - and parts of the corporate world - that Japan's system for financing the corporate sector needs to change. For while the country has historically relied heavily on bank finance, it is now slowly expanding its capital markets, as the banking industry itself restructures. Meanwhile, the government has also indicated it is ready to accept a concept that it once viewed with deep disdain: foreign funds, including buy-out groups.

But though these factors make a wonderful theoretical argument for a private equity boom, in practice the market has been very slow to develop. For in the past three years several billion dollars worth of funds have been raised by foreign and Japanese groups, including groups such as Cerberus, Ripplewood, Warburg Pincus, and Whitney. But thus far it seems that a relatively small proportion of this has actually been spent.

"There are a lot of private equity funds in the market place, but not so many examples of acquisitions," admits Dean Yoost, partner at PricewaterhouseCoopers. "It is clear to me where the market should be heading - it should be growing. But the question is one of timing."

Optimists point out that change always takes longer than expected in Japan - and stress that even though an LBO market, as defined in the US, has not emerged yet, other areas of private equity have expanded. "This is a market where things take a long time to happen," says Tim Collins, of Ripplewood, the US private equity group. "People should not get too hung up on definitions (in deals.)"

Sales of distressed debts by banks and other financial groups, for example, flourished in 1998 and 1999. And though they have recently fallen off, an estimated Y25,000bn at face value has now been been sold to foreign groups, such as Goldman Sachs, Morgan Stanley, Cerberus and Lonestar. Many of these loans are real estate linked, and have been sold at steep discounts. But even allowing for this, some observers guess that foreign groups could have spent around $10bn on this.

There have also been some purchases of large, failed Japanese institutions. Ripplewood, for example, has assembled a consortium of 10 investors to buy Long Term Credit Bank, a failed Japanese bank. WL Ross, a US private equity fund, has purchased Kofuku, an Osaka-based regional bank, and Tokyo Sowa, a Tokyo group. A group of investors, including Cerberus, have also recently purchased Nippon Credit Bank, another large failed bank. Meanwhile, Cerberus has recently purchased a large part of the assets of Nagasakiya, a failed retailer.

At the other end of the spectrum, many funds are now looking at becoming involved with smaller companies, either through venture capital, or management buy-outs - or even LBOs. These include both the type of "new Japan" companies specialising in information technology which made analysts excited last year, and also companies specialising in the "older" parts of the economy as well, where there is extensive room for restructuring.

"There is a lot of potential here," says Oliver-Kurt Drews, head of private equity at Dresdner Kleinwort Benson in Japan, which is seeking a niche providing venture capital to smaller companies. It has already concluded a few deals. It recently provided finance to Daijob.com, which specialises in internet-related job searches. And it is now seeking companies with technologies that could be exported to Europe. "Japan has a lot of exciting ideas which could lead the world," he adds.

But though these smaller deals are often exciting on an individual basis, they do not add up to the flood of investment that foreigners predicted - or enough to absorb the funds that have been raised.

This could change. What many observers are pinning their hopes on is that next spring Japan is poised to introduce consolidated accounting, which some observers believe could trigger a rash of bankruptcies, and with it strong growth in private equity opportunities. But the history of the past three years suggests that evolution, not revolution, remains the theme. With or without the sale of the Daimon liquor store, in other words, it is too early to crack open the private equity champagne in Japan.