Alice arrives, nerves shredded by rumours of violent escaped convicts, and aims a gun at both men.

What makes this Japanese-Italo-Australian Mexican stand-off truly amazing is that it was inspired by a real-life breakout by about 1,000 Japanese soldiers from a POW camp in Cowra, New South Wales, in 1944. In the ensuing battle - some might say massacre - more than 200 Japanese lost their lives.

This is the second recent Keneally novel that examines war from an antipodean angle. , also shaped by real events, narrated the first world war through two Australian nurses whose characters were expanded by the intense nature of combat in Europe. attempts - and pulls off - a similar trick of examining global conflict from the periphery. As Keneally informs us in a helpful prologue, these events "took place in August 1944, in a township far from the battlefronts and from the main discourse of the earth".

The story may be placed in the margins, but it is not marginal. Having recast Cowra as Gawell, Keneally uses the prison's volatile atmosphere to distil broader cultural, ethnic and political conflicts that flooded from the Pacific to the Atlantic. Central to the novel is the mutual amazement of warring nations: for the Japanese POWs, captivity robs them of an honourable death. This shame is magnified by their contemptuous disbelief at the Australian guards' version of honour: a grudging compassion.

It's not that Keneally's Australians are straightforwardly merciful. Some - such as Alice or Major Bernard Suttor, one of the commanders at Gawell - view the Japanese with a mixture of fear and fury as they await the fate of loved ones held captive in Burma and Singapore. In a mirror image of their Japanese captives, these emotions conceal a fundamental incomprehension about the motives and natures of the opposing side.

This is delicately caught, late in the action, when a father tries to inject manliness into his bookish son, Martin, by hunting down escaped Japanese prisoners (the father's non-too-subtle nickname is "Beefy"). Martin, his head a whirl of Shakespeare, Keats and Coleridge, finds himself face to face with one escapee, who bares his breast and, "screaming at him in gutterals", demands that he receive his death. A stunned Martin is mystified by what he can only define as a performance ("a grotesque face as if he were theatrical"). The Japanese's "threats were outrageously remote from Martin's powers of interpretation".

Such failed attempts at mutual understanding are not confined to international relationships. Keneally carefully unpicks tensions within each opposing side as well: the varied nature of the Japanese death wish, for example. There are hardcore "ultras" such as Tengan, who transforms his humiliation at capture after a bombing raid on Darwin into a form of Japanese fundamentalism driven by self-sacrifice and abasement.

At the other extreme is Ban, whose Presbyterian upbringing imbues him with an unwelcome (for his peers) sense of mercy.

A vast range of different attitudes lie in between these extremes. There is the refusnik Oka and the shame of Aoki, whose suicidal tendencies emerge from duty but also deeper, repressed feelings. Haunted by memories of his country's war with China, he recalls, if vaguely, his participation in war crimes that combine terror, relief, vengeance and a sadistic emotional release. The horrors of Aoki's unstable memory, which are "distorted … and shivered apart like a painting on a vase that is dropped and shatters", are all the more unsettling for being narrated as a series of meandering, evasive questions: "Had he actually and in the fullness of fact been the first to find a woman in a shop and drag her away from the door into the light to see that she was handsome, and then covered her mouth and flooded her with the force of their military triumph?"

The Italians and Australians are no less disunified - not least because Italy is perceived as an enemy too, despite overthrowing Mussolini and joining the Allied cause. In their own compounds, hardcore fascists vie with soldiers such as Giancarlo who don't share their fanaticism.

On the Australian side, underlying colonial tensions narrate the fractious relationship between Suttor (a radio writer by trade) and Colonel Ewan Abercare, his refined, Anglophile superior, if only by rank. Abercare's uprightness is threatened by shame of a more intimate nature: after an affair, he tries desperately to win back his wife, Emily. Indeed, this novel is full of adulterous relationships that give inescapably physical, even erotic tinges to the many divided loyalties. (Even the seemingly incorruptible Tengan is forced into sexualised encounters with Oka of a suitably self-loathing and violent nature, as honour fights it out with other impulses.)

Shame of a different sort enslaves many of the Australians on the home front. Suttor, Abercare and machine-gunners Cassidy and Heaton confront the distance between Australia and "the main discourse of the earth". The test of their pent-up frustration is the bloody Japanese outbreak, which is itself the result of months of pent-up frustration and a colossal misjudgment by Abercare.

The few Japanese prisoners who escape the salvation of machine-gun bullets fall upon Cassidy and Heaton, the two men firing them. As they overwhelm the gunners, Cassidy is proud to find himself relatively unmoved by the prospect of death: "He tested himself for terror, probed the skin, but found that there was, above all, a certain anxiety there, different from fear - and peevishness". Calm enough to jam the gun before it lands in the control of the Japanese, his final thoughts include the poignant and the oddly pathetic: "They'd take him seriously as a soldier now."

This climactic set piece of almost unimaginable violence - of Japanese self-immolation and Australian complacency turned to murderous panic - is wonderfully achieved: from the outbreak itself to Tengan's slow progress towards Alice's farm. At the heart of the gore, however, is the contemplation of death in many forms. There is the visceral act, whether prolonged or unnervingly matter-of-fact: Oka slits the throat of a friend mortally impaled on barbed wire; two escapees calmly consider whether death by train is better than by hanging.

But death is also the ultimate act of escape, of liberation. For the Japanese, it is a place that is eternally safe, where all mysteries are solved. For the Australians, a moment when the flesh and spirit part company.

When Heaton is set upon, with an oddly cheerful "world-ending wallop", "his components of body and personhood flying apart along hectic avenues of yellow and blue light, tearing him away from torches and trams and sisters". This last detail is moving. The captive set free?

is a fine novel that asks challenging questions about death, about the cultural differences of East and West, about cruelty and mercy, about ideals and violence. The friction between them can be unsettling. Keneally uses terms such as "Oriental", "inscrutable" and "slit" (in terms of eyes) to interrogate Western prejudices about fathomless Japanese soldiers.

That the novel feels authentic owes much to Keneally's way of fleshing out a character, his skill at dramatising the war of weapons and points of view, and the unflinching vision that portrays humans at their worst, and on occasion their best.

is sobering, horrifying, even oddly uplifting. Prepare to be amazed.