Rising debt levels leave Asia facing deflation

Asia's rapid accumulation of debt in recent years is holding back central banks from easing monetary policy to fight the risk of deflation, endangering private investment needed to boost faltering growth, according to Morgan Stanley.

Debt to gross domestic product ratio in the region excluding Japan rose to 203 per cent in 2013 from 147 per cent in 2007, with most of the increase led by companies, analysts in Hong Kong wrote in a report.

The ratio is close to or has exceeded 200 per cent in seven of 10 nations including China and South Korea, they said.

Deflation risk is spreading from Europe to Asia as oil prices plunge, raising the spectre of companies and consumers postponing spending and threatening global economic recovery.

Asia could take its cue from the United States where a policy of keeping real rates low after the 2008-2009 global financial crisis encouraged private-sector investment and boosted productive growth, Morgan Stanley said.

"When real rates are high, only the public sector or government-linked companies will take on leverage," the economists wrote. The key concern with an approach of keeping real rates at elevated levels is that the private sector will continue to be hesitant to take up new investment, the report said.

Asia's policy makers are balancing the need to support domestic demand and curbing debt and asset bubbles.