Asian equity markets diverged sharply on Wednesday, with Japan's Nikkei struggling for direction ahead of closely watched US inflation data while South Korean shares surged on a chipmaker-led rally.

The Nikkei was last trading roughly flat, up around 0.05% and hovering near 67,010, after swinging between a gain of about a quarter of a percent and a loss of around a third of a percent earlier in the session. The broader Topix performed slightly better, rising around 0.4% to approximately 4,120.

Investor caution in Tokyo centred on the US Consumer Price Index release due later Wednesday, which is seen as a key input for whether the Federal Reserve might move up the timing of future rate hikes. The CPI print comes against a backdrop of sticky services inflation and resilient US labour market data in recent months, keeping the debate over the Fed's next move unresolved. Analysts said Japanese investors were reluctant to buy aggressively ahead of the data as markets continued to assess that possibility, with AI-related shares that carry heavy weight in the Nikkei trading mixed.

Geopolitical uncertainty also weighed on sentiment. The US and Yemen's Iran-aligned Houthis reported separate attacks on shipping on Tuesday, while Iran's top security official reiterated that the Strait of Hormuz will remain closed unless Washington accepts Tehran's conditions for ending the conflict, dimming hopes for a near-term breakthrough. The strait accounts for roughly a fifth of global daily oil consumption, making any disruption risk a direct channel into energy prices and, by extension, inflation expectations across Asia's import-dependent economies.

South Korea told a markedly different story. The benchmark Kospi extended its gains for a third consecutive session, rising roughly 220 points, or around 3.5%, to about 6,565, its highest level in more than a week, as semiconductor stocks jumped on renewed AI optimism. Korea is home to Samsung Electronics and SK Hynix, the world's two largest memory chipmakers, giving the Kospi outsized sensitivity to shifts in the global semiconductor cycle.

The rally came despite a softer session on Wall Street overnight, where Amazon and Alphabet both slipped as investors grew more pessimistic about the prospects for a Middle East deal, even as the Philadelphia Semiconductor Index still managed to rise around 1%.

One market participant said flows into semiconductor and domestic AI-related stocks were improving on the back of robust AI infrastructure demand, pointing to recent signals from Coreweave and Supermicro as evidence of that trend. Samsung Electronics gained around 6%, while SK Hynix rose almost 4%, with both stocks benefiting directly from the AI infrastructure narrative driving the broader move.

Foreign investors were net buyers of Korean shares worth around 900 billion won, or roughly $635 million, even as the Korean won weakened against the US dollar and the country's benchmark bond yield held steady.

The divergence between the two markets highlights how differently the same global cross-currents are being absorbed: a pending US inflation print, uncertain Fed policy and an unresolved Middle East conflict are keeping Japanese investors on the sidelines, while Korea's chip-heavy market is responding much more directly to the AI demand story.

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Earlier:

Japan bond yields rise as oil gains stoke fresh inflation concerns

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Tokyo is waiting on the Fed, Seoul is riding the AI chip cycle, and for one session those two stories looked starkly different.