Chip-heavy South Korean and Taiwan stocks led equity gains in Asia's emerging markets on Friday, while currencies edged higher after Bank of Japan delivered a widely-expected interest rate hike.

MSCI's emerging Asia equities index advanced as much as 1.7%, propelled by South Korean and Taiwan stocks which carry much of the index's weight.

South Korea's KOSPI and Taiwan's TAIEX rose as much as 2.8% and 1.7%, respectively, to one-week highs, as regional chip stocks tracked overnight gains in US peers.

News around the deployment of advanced AI models, notably for pharmaceutical and drug discovery research has reignited optimism around monetization of AI, said Ecaterina Bigos, senior market strategist at BNP Paribas Asset Management.

At this juncture, any signs of monetization will validate the immense capital spending by hyper-scalers, with Asia's markets rallying alongside the US as the region remains central to global AI supply chains, added Bigos.

South Korean chipmakers Samsung Electronics and SK Hynix advanced as much as 3.6% and 6.1%, while Taiwan's TSMC gained as much as 1.4% after the Philadelphia Semiconductor Index rose 3.1% overnight.

Additionally, a 1% drop in oil prices kept investor sentiment high in the two oil-importing markets, even as the price remained above $100 a barrel.

The Bank of Japan raised interest rates to a 31-year high of 1.25% and signalled readiness to keep pushing up borrowing costs, joining its European and US peers.

The widely expected move, dissented on by two board members, highlights central banks' focus on global inflation risks generated by war in the Middle East, expansionary fiscal policies and surging demand for AI investment.

"Our forecast that the Bank will lift its policy rate to 2% as soon as mid-2027 is more aggressive than what the financial markets are pricing in," Marcel Thieliant, head of Asia-Pacific at Capital Economics, wrote in a note.

Japan's policy rate could rise above 2% into restrictive territory, if there is a marked acceleration in services inflation and stronger pay hikes in upcoming spring wage negotiations, added Thieliant.

The US dollar index was flat at 100.23, after edging back from a 2-1/2-month high on Thursday.

MSCI's gauge of EM currencies edged higher, with Taiwan dollar and the ringgit gaining 0.4% and 0.5%, respectively, while the South Korean won dropped 0.4%.

Elsewhere in the region, Jakarta stocks shed as much as 0.9%. In energy import-reliant countries -- Thailand gained 0.6%, while the Philippines gave up nearly 1.2% to drop to a fourteen-week low.

HIGHLIGHTS:

** AirAsia's Fernandes says travel demand remains strong, current crisis 'far' less severe than COVID

** Indonesia finance minister says discussion on fiscal limits must be constructive

** Taiwan's central bank kept its policy interest rate on hold on Thursday - Reuters