H3K9 methylation (H3K9me) is a conserved marker of heterochromatin, a transcriptionally silent chromatin structure. Knowledge of the mechanisms for regulating heterochromatin distribution is limited. The fission yeast JmjC domain-containing protein Epe1 localizes to heterochromatin mainly through its interaction with Swi6, a homologue of heterochromatin protein 1 (HP1), and directs JmjC-mediated H3K9me demethylation in vivo. Here, we found that loss of epe1 (epe1Δ) induced a red-white variegated phenotype in a red-pigment accumulation background that generated uniform red colonies. Analysis of isolated red and white colonies revealed that silencing of genes involved in pigment accumulation by stochastic ectopic heterochromatin formation led to white colony formation. In addition, genome-wide analysis of red- and white-isolated clones revealed that epe1Δ resulted in a heterogeneous heterochromatin distribution among clones. We found that Epe1 had an N-terminal domain distinct from its JmjC domain, which activated transcription in both fission and budding yeasts. The N-terminal transcriptional activation (NTA) domain was involved in suppression of ectopic heterochromatin-mediated red-white variegation. We introduced a single copy of Epe1 into epe1Δ clones harboring ectopic heterochromatin, and found that Epe1 could reduce H3K9me from ectopic heterochromatin but some of the heterochromatin persisted. This persistence was due to a latent H3K9me source embedded in ectopic heterochromatin. Epe1H297A, a canonical JmjC mutant, suppressed red-white variegation, but entirely failed to remove already-established ectopic heterochromatin, suggesting that Epe1 prevented stochastic de novo deposition of ectopic H3K9me in an NTA-dependent but JmjC-independent manner, while its JmjC domain mediated removal of H3K9me from established ectopic heterochromatin. Our results suggest that Epe1 not only limits the distribution of heterochromatin but also controls the balance between suppression and retention of heterochromatin-mediated epigenetic diversification.