Global defense spending rose by 2.9% over the past year. This rearmament is accompanied by economic and geopolitical shifts. In a new episode of The Spillover, co-hosted with Sebastian Mallaby, BWC Vice Chair Rebecca Patterson, highlights the implications of this arms race, specifically in the case of Japan. The country is entering a new phase under new Prime Minister Takaichi, who seeks to make some changes to Japan’s traditional pacifist stance, as China’s posture in the region becomes increasingly assertive, and the United States’ commitment to its overseas allies grows increasingly uncertain. They also explain the macroeconomic implications of this shift toward “guns and butter.” Rearmament increases government spending, which translates into greater government-led economic stimulus, leading to higher inflation, which in turn drives up interest rates in the bond market. Faced with these changes, central banks must respond by raising their key interest rates.

To listen to the full episode, click here.

All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.