There¡¯s never been a more popular time to be an activist investor in Japan.

For activists, the country has always been seen as fertile but dangerous ground, full of cash-rich companies that trade at extreme discounts. But for years, a closed-off business world resisted outsiders, making the strategy an exercise in frustration.

That has changed as the government and the Tokyo Stock Exchange have aligned to push corporate Japan to pay more attention to shareholder returns. International hedge funds such as Elliott Management and home-grown investors such as Strategic Capital have turned the country into the world¡¯s second-largest market for activists, outstripped only by the United States.

So far this year, activists have made 100 investments in Japanese companies with a market value of around $318 billion, according to data compiled by Bloomberg. That¡¯s compared with 102 companies with a value of about half the amount for all of 2023. Shareholder proposals are at a record high for the third consecutive year.

While exact returns are difficult to quantify since investors typically build up positions ahead of disclosure, overall, last year¡¯s campaigns outperformed the benchmark Topix index by 2.3 percentage points, while this year¡¯s crop are 4.6% ahead of the market, according to data compiled by Bloomberg.

The lure for activists has been a new emphasis on corporate governance reform. The powerful Financial Services Agency has pressured companies to end cross-shareholdings, a decades-old practice that provided reliable support for management to fend off outside investors.

Another champion for change has been Hiromi Yamaji, who is in charge of the bourse. After taking the position in 2023, he introduced a public name-and-shame list of firms whose shares traded below book value. While there was no actual penalty, the threat of public humiliation forced executives to come up with plans to raise their market capitalization.

¡°It¡¯s a huge change,¡± said Michael Jacobs, an investment analyst at T. Rowe Price Japan, who has spent 25 years working in the country. ¡°The TSE and Yamaji-san have helped to give public companies and the entire investor base a common language.¡±

The shift has also redefined the role that shareholders play in the country. Historically, companies have relied heavily on debt, giving lenders, rather than shareholders, the biggest sway over firms. In Japanese, activists have been traditionally termed ¡°shareholders who say things,¡± a reflection of the widespread perception that investors are supposed to be quiet and support management.

That is not the style of one of the most successful activists, Elliott. The U.S. hedge fund founded by Paul Singer made its name battling the government of Argentina for 15 years over defaulted debt. The fund has been investing in Japan since at least...