Asia must navigate four big challenges in 2014 – inflation, interest rates, Japan's regional role and politics – all of which could dent investors' hopes for a cheery new year, HSBC said.
"Risks are finely balanced. For each positive, a significant challenge remains," said Frederic Neumann, HSBC's co-head of Asian economics research, in a note.
The lack of inflation is a key issue as it has been accompanied by a collapse in nominal gross domestic product growth, he said.
Excess capacity has meant profit growth has suffered as margins were squeezed and capital spending could decline, Neumann said, adding as a follow-on effect, slower economic and corporate profit growth may impair the ability of governments, households and companies to service debt.
Low inflation has been a bugbear mainly in developed markets, with lower-than-expected inflation in the Eurozone spurring concerns over the region's nascent economic recovery. U.S. consumer prices were essentially flat in November.
Japan has struggled for decades against the pressures of deflation on its moribund economy. Abenomics – a series of policy measures unveiled under Prime Minister Shinzo Abe in April to jump start the economy – helped to spur the country to a 1.2 percent on-year rise in inflation in November, marking a five-year high.