Middle East tensions and currency volatility have caused Japan’s record stock rally to falter, but the weakness looks temporary as solid corporate fundamentals and the long-term outlook for artificial intelligence provide support.

That’s the view of Koji Nakatsuka, chief investment officer for Japan equity at Allianz Global Investors, which manages $2.4 trillion in assets globally. "If everything gets normalized, the Japanese stock market has an upside potential toward the end of the year. The Nikkei may return to its record high levels by year-end,” he said.

Japanese stocks have come close to a technical correction after surging to all-times highs earlier this year, as traders slashed bets on the Federal Reserve’s interest rate cuts. That spurred renewed strength in the dollar and pressured the yen, which has weakened to nearly ¥155 against the greenback. It’s a level that has raised concerns on possible intervention by authorities and triggered warnings from Wall Street brokerages, at a time when rising geopolitical stress is prompting a flight to safety.