Nikkei average exceeds 40,000 people.Staying there may depend on that $7 billion.

As global capital rediscovers Japan, it’s no surprise that veteran financiers regularly seek evidence that Japan’s corporate governance revival is genuine.

It’s not personal. But as with Charlie Brown, Lucy and football, this isn’t investors’ first exposure to the many stories surrounding Asia’s second-largest economy.

Indeed, efforts over the past 10 years to increase return on equity and give shareholders more voice have paid off, with the Nikkei Stock Average exceeding 40,000 yen for the first time. Still, 2024 is likely to be the year to trust but verify.

In this context, efforts by the US activist fund Elliott Investment Management to induce Japan’s largest real estate group, Mitsui Fudosan, to announce a nearly $7 billion share buyback, are subject to real-world investigation. Equally noteworthy.

Early this month, financial times It was first reported that the company had acquired more than 2% of Mitsui Fudosan’s shares. Elliott is asking the developer to reduce its interest in Oriental Land, which operates Tokyo Disney Resort.

This movement is worth tracking for two reasons. For one thing, the 82-year-old Mitsui Fudosan is a Japanese corporate icon that ticks a lot of boxes for why Japan is on the rise again.

Jesper Coll, specialist director at Monex Group, told CNBC: “Pressures on Japanese companies are now unrelenting and lazy balance sheets will no longer be tolerated. A hitherto out-of-reach elite company – Mitsui Fudosan, the undisputed leader in Japanese-led real estate development domestically and globally – will also be tolerated. , is now a target.”

Second, Elliott has proven to have a knack for setting visionary goals for change. Twelve months ago, the company founded by Paul Singer successfully coaxed Dai Nippon Printing into the largest stock buyback in its 147-year history.

Dainippon was a wise choice by the Florida-based investment firm. Although it has a long history, it is a name that is not well known around the world. But Big Japan is a great microcosm of why global capital is vying for Japan’s path. The company is cash-rich, has a quietly dominant presence in global supply chains, and its stock price tends to be well below book value.

For example, Dainippon has a significant global market share in components needed to manufacture smartphones, electric vehicles, semiconductors, and other critical technologies. On any list of undervalued but promising Japanese stocks, Dainippon Stock deserves a position near the top.

All of this makes Elliott’s focus on Mitsui Fudosan very interesting.

Of course, investors can debate whether Elliott’s much-needed sale of Oriental Land stock is the best course of action. Could Mitsui Fudosan instead decide to use the proceeds from its 5.4% stake in the development company to invest more aggressively in future growth projects?

Whatever happens, the pressure being exerted by Elliott and the apparent lack of resistance by Mitsui Fudosan are clear signs that Japan is a different place than it was in 2014.

That year was the year when the Liberal Democratic Party, led by Prime Minister Fumio Kishida, finally got serious about strengthening Japan Corporation’s financial game. It began imposing a British-inspired stewardship code, encouraging companies to increase returns on capital, abolish old economy cross-shareholding arrangements with friendly corporate groups, and give shareholders more voice. .

Ten years later, these upgrades are finally gaining traction. The most obvious evidence is that the Nikkei Stock Average has soared above its 1989 “bubble economy” peak. This is helping to replace Tokyo’s status as a cautionary tale with the spirit of a hot investment destination in its infancy.

Will the Nikkei Stock Average’s rise of more than 46% over the past 12 months continue? only time will tell. But how this bull market progresses will have a lot to do with how well Kishida’s party plays its cards.

Unfortunately, this deck may not be as hot as many global investors who are looking to get ahead this way think. The problem is that the Liberal Democratic Party’s success in getting corporate Japan out of the 1980s is not matched elsewhere in Asia’s second-largest economy.

The background to this is that when the Liberal Democratic Party returned to power in December 2012, it boldly advocated future structural reform shock therapy. But it mainly meant that the Bank of Japan supersized its quantitative easing program and caused the yen to depreciate by 30%.

Exports soared and corporate profits expanded. But then-Prime Minister Shinzo Abe quickly shelved plans to reduce bureaucracy, internationalize labor practices, reignite innovation, increase productivity and empower women.

The Abe administration from 2012 to 2020 primarily sought to make the 1980s-style “trickle-down economy” great again by prioritizing a weak yen and corporate restructuring. Things are not going well for the majority of Japan’s 125 million people, with inflation outpacing average wage growth.

That’s why it’s important for Mr. Kishida to prove to foreign investors who want Japan to give Japan another shot that new reforms are on the way. Kishida came to power in October 2021 promising a “new capitalism” to improve the fortunes of middle-class families whose incomes have stagnated for decades. He has made little if any quantitative progress.

The same goes for Mr. Kishida’s shrewd plan to use the world’s largest pension reserve fund ($1.5 trillion) to finance the startup boom. This too is still largely under consideration.

Does Mr. Kishida, whose approval ratings are in the low to mid-20s, have the political wherewithal to push a change-averse Congress to take risks and shake up an aging economy? One view is that this may be his government’s only means of survival.

Mr. Kishida could do worse than being involved in the detonation of corporate processes at Japan Inc.’s flagship companies like Mitsui Fudosan. And as 2024 heats up, why are top global investment firms like Elliott pouring more and more time and resources into Japan? Prime Minister Kishida must act quickly to confirm the confidence that the largest capitals have in the economy.