The chart shows the Japan housing index 1975-2018 Q1. There is a fascinating history behind this but I won’t go into that now. The point is about the risk of something similar happening here. Banking and insurance capital models work on the principle of Value at Risk, i.e. the amount required to sustain a loss over a specific time horizon, to a specified probability. For example, the advanced Basel IRB model has a time horizon of 1 year, with a probability of 1 in 1,000. The Solvency II model has the same time horizon, but a probability of 1 in 200. So the first would last us from the succession of Cnut the Great in Denmark in 1018 until now, the second from the birth of Karl Marx in 1818 until now.
But I wonder. Could the probability of a Japanese-style collapse here in the UK (or anywhere else in the West) be only 1 in 200? Ask most professionals in the business of capital management and they will say so. The fact that it happened in Japan doesn’t mean it could possibly happen here. Japan is such a terribly different, utterly different place from Britain, that no connection can be drawn between the two scenarios.
But I still wonder. There is a good FT article (31 August 2018) by Gillian Tett about a Japanese central banker warning that a financial crisis was about to explode. Déjà vu, he was saying, presumably not in Japanese, referring to the banking crisis sparked off by the collapse of the baburu keiki, or bubble of the 1980s, leaving about $1tn of bad loans.
If it happened there, could it happen here?