I personally think its both - mental and physical that is - though it is very much a truth that what we are generally left with in martial arts training is much more about imaginings than it is about development of the things fudoshin points to in terms of mindset, in additional to the physical. Too often we do see musings of the "all I need is the will to win" variety, appeals to authority of "battlefield tradition," or combatives that are predicated on physical attributes and the closed environment of competitive martial sports.
Similarly, it is a mistake to think that development of physical and technical skills absent the legitmate mental aspect is sufficient. Numerous examples of this, both under fire and in force on force training. It is and always will be the interplay of both.