Kar-yiu Wong

Summary. The relationship between the United States and Japan is unique in
some respects. Japan is not allowed by its Constitution to maintain military
forces, for example, and treaties between the countries require the United
States to provide military protection to Japan, but not vice versa.

The United States is one of the biggest defense spenders in the world,
currently spending 6 to 7 percent of its GNP on defense. In contrast, until
recently, Japan has spent less than 1 percent of its GNP on defense. The
United States has repeatedly urged Japan to increase its share of the defense
burden.

Two hypothetical cases demonstrate the effects of expenditures on defense.
First, an increase in American defense expenditures might affect resource
allocation within the U.S. economy, its trade with Japan, and the welfare of
both countries. Although an increase in U.S. defense expenditures would be
beneficial to its military allies like Japan, Japan might be hurt indirectly by a
rise in the prices of the American products Japan purchases. Second, if Japan's
defense expenditure in the 1970s had been larger, its capital accumulation
would have been seriously hurt, but the effects on labor employment and GNP
would have been much less. For example, if Japan had maintained defense-to-
GNP ratios from 1970 to 1985 the same as those of the United States, its
capital stock might have shrunk by 37 percent, but labor employment in the
private sector and GNP would probably have fallen by only 2 percent and 8
percent respectively.

The United States and Japan might share the defense burden. One way
would be for Japan to pay more for the military protection it receives. If the

-81-