Japanese stocks are expected to remain volatile, and the indexes are forecast to stay below their all-time highs, through the end of the year.

“We believe that the macroeconomic environment will remain unsettled. The U.S. economy is still walking a tightrope, as it’s difficult to determine whether it will settle down with a soft landing or a hard landing,” said Nozomi Moriya, an equity strategist for Japan at UBS Securities.

Under these circumstances, stocks will likely be volatile with every piece of major economic data even slightly outside of expectations.

On Wednesday, the 225-issue Nikkei average plunged 4.2% — its sharpest fall since the 12% crash on Aug. 5 — as U.S. stocks declined overnight.

The yen has been trading strongly, moving from ¥147 to the dollar to about ¥143.5. It is now where it was at the beginning of the year.

With Nvidia’s near 10% drop Tuesday, shares in New York slumped, with the S&P 500 dipping 2.1% and the Nasdaq Composite index shedding 3.3%.

“Wednesday's sharp decline was because of the worst conditions for Japanese equities: weak U.S. stocks and a strong yen,” said Yutaka Miura, a senior technical analyst at Mizuho Securities.

On Thursday, the Nikkei was down by about 1% in the afternoon. It is still about 13% below its all-time high, achieved in early July.

Japanese stocks are heavily influenced by movements on Wall Street and the dollar-yen exchange rate, but those two factors remain uncertain due to the unpredictable U.S. presidential election and the U.S. economic outlook, Miura said.

On Aug. 5, Japanese stocks were hit hard after a surprise rate increase by the Bank of Japan and the dramatic gain of the yen following data from the United States that suggested the U.S. Federal Reserve might have to start cutting rates rapidly.

Japanese stocks have rebounded since then, largely due to the rise in U.S. stocks, but analysts forecast that a full recovery is still not in sight.

“I believe it’s quite tough for the Nikkei average to recover to the 40,000 level” anytime soon, Miura said.

When the Nikkei index rose to a record high of above 42,000 in July, the yen was trading at about ¥160 to the dollar. A weak Japanese currency helps to boost the earnings of large Japanese exporters.

The recent strengthening of the yen is now hitting their bottom lines.

Miura added that stocks often perform poorly in the months ahead of a U.S. presidential election.

UBS forecasts that the Nikkei index won’t recover to the 40,000 level this year. It has set an end-2024 target of 39,000.

Japanese stocks are expected to rally in the longer term, Moriya added.

“Although macroeconomic instability may still linger this year, we believe that a recovery to the 40,000 level over the next year is quite possible.”

She pointed out that Japanese stocks are relatively undervalued while Japanese companies have been making efforts to improve their performance through corporate-governance reforms.

Business restructuring and industry reorganization seem to be gaining momentum as well.

“I believe that once macroeconomic conditions stabilize a bit more, the structural upside of Japanese stocks will emerge again,” Moriya said.

Investors are carefully watching the policy stance of the BOJ, which is looking to continue upping rates — a move that will likely push up the yen.

Although the surprise rate hike at the end of July spooked markets, BOJ Deputy Gov. Shinichi Uchida eased concerns on Aug. 7 by saying that the central bank does not intend to raise rates in times of instability.