Can Japan mobilise enough venture capital to finance its promising venture firms and to support its advance into high-tech? The authors use institutional economics, and the principal-agent as well as the transaction cost approach in particular to answer this question. Firstly, a number of stylised facts is presented to substantiate Japan's problem. Afterwards, the theory-based viewpoint is introduced to show why Japan still has difficulties to effectively process venture capital. The authors survey changes taking place and look at topical policy issues. They conclude that Japan is moving towards more functional venture capital financing, but that the financial system will remain hybrid in the sense of relying both on relational contracts typical of credit-based systems and on the more explicit contracts of arms'-length markets.