Abstract
This chapter investigates defense spending and its impact on the Japanese economy. According to our empirical results, a cut in defense spending encourages investment by business firms and accelerates economic growth in Japan. Government spending on infrastructure also contributes to economic growth by improving productivity in the private sector. This analysis indicates that Japan's economic prosperity is due mainly to being able to enjoy peace for nearly a half century with a low level of military spending: the share of defense spending in GDP has been less than 1%. Instead of spending on military activities, the government has played a central role in economic development by providing public goods and infrastructure. Japan's experience illustrates how large the peace dividend would be.
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