Sugawara joined AZ on loan from Japanese club Nagoya Grampus in 2019, before making the move permanent the next year. He has made 138 Dutch Eredivisie appearances for AZ and holds the club record for most appearances in European competitions, playing 53 matches.
"Last summer I played against Southampton in the pre-season," Sugawara, who has earned 13 caps for Japan, said in a statement.
"I felt Southampton is a really good club. When Southampton gave me an offer, I said yes after one second!"
Southampton manager Russell Martin said Sugawara was their number-one pick for the right-back position.
"He arrives at a good age with a lot of games already under his belt at a high level, including a wealth of European experience," Martin said.
"You can sense his enthusiasm and determination to do well - he’s really excited to play for Southampton, not just to play in the Premier League."
Southampton begin their Premier League campaign at Newcastle United on August 17th.
