- bank financial institutions, and of the non - banking activities of banks - quite apart from micro - prudential regulation in the interests of consumer protection. it provides justification, too, for some form of consolidated prudential oversight of multifunctional financial groups and for monitoring large exposures, both intra - group and to outside counterparties. where a problem of this sort does arise, it may well justify technical central bank intervention to help contain it - for example by facilitating payments and settlements to minimise market disturbance. but, i would be very cautious about extending last resort liquidity provision to financial institutions not engaged in banking activity, and where the particular justification for it, based upon banks ’ distinctive functions and the distinctive characteristics of banks ’ balance sheets, did not clearly apply. while i do not think such intervention can, realistically, be excluded altogether, i am concerned that an unduly liberal interpretation of systemic risk would increase the scope for moral hazard and ultimately weaken the safety and soundness of the financial system as a whole. conclusion mr. chairman, my answer to your question are banks still special? is essentially that while in some respects they may be less special than they were, they remain special nonetheless. they remain special in terms of the particular functions they perform - as the repository of the economy ’ s immediately available liquidity, as the core payments mechanism, and as the principal source of non - market finance to a large part of the economy. and they remain special in terms of the particular characteristics of their balance sheets, which are necessary to perform those functions - including the mismatch between their assets and liabilities which makes banks peculiarly vulnerable to systemic risk in the traditional sense of that term. perhaps the day will come - and i do not at all exclude the possibility that other financial activity will continue increasingly to be carried on alongside banking activity, even on the same balance sheet, indeed i expect that to happen. that, in my view, does not reduce the special public interest in banking activity ; although it may well affect the appropriate substance of banking supervision ; and it certainly extends to banks ’ other, different, functional public interests, including different regulatory interests. on the other hand i am not persuaded that the special public interest in banking activity extends to non - banking financial institutions, though different functional public interests in many cases clearly do. what is absolutely clear, in a world of increasing financial integration, is that neither the financial regulators nor the central bankers among you can expect

, market participants remain cautious about the economic outlook. various causes are cited for the significant fall in stock prices since the beginning of the year : renewed concern about the nonperforming - loan problem ; uncertainty over the social and economic systems in japan as a whole ; and pressures to decrease the differential between domestic and international stock prices in terms of various measures of evaluation, such as the price / earnings ratio. it is extremely difficult to assess each factor and to specify the cause of the uncertainty. still, the overall trend in the financial markets over the past several months clearly indicates that market participants have a cautious outlook on the economy, as shown by the slowdown in growth or even a decline in stock prices since autumn 1996, and by the concurrent decline in long - term interest rates. cautiousness on the part of the market participants reflects the fact that they are strongly aware of the following three issues : ( 1 ) effects of the anticipated fiscal tightening in the next fiscal year ; ( 2 ) structural adjustment pressures facing japanese industry ; and ( 3 ) balance - sheet adjustment of firms and the nonperforming - loan problem of financial institutions, both of which are burdens created by the economic “ bubble ” and its burst. before explaining the bank of japan ’ s views on these issues, i would like to emphasize that my talk today is not intended to draw specific conclusions or to assess the levels of stock prices and interest rates. this requires careful analysis and is an issue on which a central bank governor should refrain from comment. rather, i would like to give you an idea of how the bank examines these issues. b. effects of fiscal tightening the first issue that i would like to discuss is the influence of fiscal tightening - such as reduction in public - sector investment, rise in the consumption tax rate, and termination of special tax reduction - - on the economy for the next fiscal year. public - sector investment began to decline in autumn 1996, after having continued to expand until mid - 1996 as a result of the economic measures introduced in autumn 1995. although there may be a slight temporary increase in public - sector investment reflecting the implementation of the supplementary budget for the current fiscal year, the declining trend is expected to continue for some time. in addition, an increase in the consumption tax rate and the termination of the special tax reduction is scheduled for fiscal 1997. it is important to mention here that the influence of fiscal tightening on the economy may vary significantly depending on the prevailing economic conditions, such as corporate profits and