Japan's stock market is leaving others in the dust this year

• The return of Japan to a leadership position among global markets — after literally decades of being viewed as a dead end for capital — is another reflection of how COVID, Ukraine, and the growing China-U.S. split are reshaping the world economy.

The latest: The Nikkei has notched a 14% gain so far this quarter, clambering to its highest closing level in nearly 33 years on Tuesday. The Japanese benchmark is up 22% this year, trouncing the performance of other large markets.

What's happening: Japanese stocks are getting a boost from a few separate but related shifts, that add up to a transformative moment for the world's third-largest economy.

1.) After the better part of four decades, Japan has inflation again.

• The country's economy had been stuck in a low-growth, deflationary environment since it suffered a massive real estate and banking crisis in the late 1980s. Japanese companies have pricing power again, helping push 2022 corporate profits to record highs.

2.) With that profitability, policymakers see a chance to push through long-sought reforms to the country's sleepy corporate giants.

• For instance, this year the Tokyo Stock Exchange has begun quietly pressuring some companies — those trading below their price-to-book value — to boost cash return to shareholders, or potentially face delisting. Buyback announcements, once modest in Japan, have soared.

3.) The market's rise also mirrors growing tension between the U.S. and China — respectively, Japan's most important ally, and its massive neighbor — especially after Russia's invasion of Ukraine returned the issue of territorial conquest to the global stage.

• Companies in geopolitically sensitive sectors like defense and semiconductors have been major drivers of the rally this year — just look at Mitsubishi Heavy Industries and Tokyo Electron.

4.) Foreign investors are also starting to pile in, analysts say. Notably, this includes Warren Buffett, whose Berkshire Hathaway has boosted its key Japanese holdings recently.

• And Goldman Sachs analysts wrote in a June 2 note: "We recently had an extensive set of investor conversations in the US and Canada. Overall, the mood on China was as or more bearish as we have encountered over many years of such interactions. In contrast, interest in Japan was much higher than we typically find, especially regarding the theme of corporate change.”

Yes, but: Japan has had prior rallies that caught the market's attention — only to peter out.

• For instance, in 2013 the political ascension of Prime Minister Shinzo Abe and his economic revitalization program — known as Abenomics — generated a sizable market boost.

The bottom line: But if the shifts in the global economy — including the return of inflation and growing tensions with China — and its own corporate sector prove durable, then Japan's next decade could look very different from its last.