There’s much more variation in European swords so it’s hard to say ‘the Japanese sword is better than the European one’ because there’s almost definitely a European sword specialized for whatever use case you’re comparing the swords for.

That in and of itself is actually very important; why is there more variation in European swords? Because of armor -- chain mail & shields, specifically. The widespread deployment of these technologies demanded bespoke counter-innovations, such as the estoc (which could pierce chain mail) and the longsword (which could survive hard impacts while still being finessed around shields). These comparatively clumsy arms evolved in direct response to an environment which was overly effective at thwarting the brutal efficiency of the light blade.

True, armor did exist in Japan, though, for most of Japanese history, distribution was largely limited to the Samurai class due to material scarcity. The common footsoldier, instrumental in all war, was generally forced to make do with much less, so simple blades were already extremely effective against them. As a result, there were major innovations in anti-sword arms, such as the naginata and yari, while swords evolved more slowly in response (e.g.: the tachi being replaced by the katana).

Eventually, effective anti-sword armor did become more widespread, but we can only speculate as to what innovation it might have spurred because this era was abruptly cut short through the introduction of the matchlock rifle. Matchlocks were so devastatingly effective against Japanese armor that, by the start of the 17th century, Japan likely had more guns than any other country on Earth. The vast majority of these firearms were manufactured domestically -- as one might imagine, there was no shortage of potential gunsmiths to be recruited from the swordmaking industry. As for gunpowder... where the island was once stingy with iron, saltpeter and sulfur were provided in eager abundance.