The Mothers board, a Nasdaq-style market for small start-ups listed on the Tokyo Stock Exchange, has soared 32% since the start of the year to its highest in more than two years.
Shenzhen's stock exchange index is this year's second-best performer, rising more than 28%, followed by Korea's KOSPI index with a 9.96% gain this year.
"This is fuelled almost exclusively by individual investors betting on stocks that benefited from coronavirus lockdowns," said Yosuke Nakamura, a senior researcher at NLI Research Institute. "Japan's new government also plans to place more emphasis on IT and digitalisation."
The Mothers board comprises mostly small-cap software, Internet services and biotech companies, favoured by many Japanese retail investors.
There have been 32 initial public offerings so far this year on the Mothers index, which has boosted investors' expectations of a further rally in stocks.
Small cap stocks quickly bounced back from the coronavirus shock, supported by "the presence of retail investors who favour momentum trades", analysts at Okasan Securities said in an Aug. 24 report.
The best performing company on the Mothers index is e-commerce platform BASE Inc, up 510% this year.
Mercari Inc, which runs a platform allowing users to auction goods to each other, has the largest market capitalization on the index at 743.6 billion yen ($7.13 billion). Its shares have climbed more than 116% so far this year.
The Mothers index rose 0.51% on Friday.
($1 = 104.2600 yen)
By Eimi Yamamitsu