Increase in the cost of children is often accounted for as one of the major causes of the recent decline in birth rates in Japan. This paper examines the cost of children by utilizing the 1343 observation of cross-sectional micro data of "Household Survey of Family Income and Expenditure" and "Family Savings Survey" of 1995 by the Statistics Bureau, Management and Coordination Agency, Japan. The two data sets were match-merged by household identifier for the estimation purpose. The estimation of child cost using Japanese micro data has rarely been conducted before. First, the estimation of equivalence scales by the number and age group of children was attempted using the Engel's food share method. The estimation was given to the sub-sample of married couples whose main income earners are wage and salary earners in the age group less than 55 years old. The measure showed that equivalence scales for an additional child is 0.2 compared to a childless married couple. The scale is 0.13 for a child less than school age, and 0.28 to 0.30 for a child over 7 and under 22. When the cost of wife's labor supply was measured in the same way, the cost was around 0.05 to 0.10, indicating the reduction in the home production by wives' time use. The Engel Model specification assumes the number of children, as well as household income to be fixed or predetermined. However, in life cycle models, both fertility and female labor supply are the variables to be determined. The recent decline in the number of children in average households may result not only from the increase in the short-term child cost but also from the decline in the long-term child benefit. The latter half of the paper attempts to see whether child benefit entails investment return to parents for post-retirement, or whether the major benefit to parents is in the enjoyment of child service consumption. Ordinary least square regression showed that monetary capital accumulation, namely, total gross and net monetary savings, bank deposits, and private pension investments, significantly declined with the increase in the number of children in the household. On the other hand, investment to one's own housing positively correlated to the increase in the number of children. Children, therefore, were substitutes to monetary savings and complements to home ownership. However, when two-stage least square method was conducted using the number of children and monetary asset as two endogenous variables, the result showed that increase in child number caused the decline in monetary assets but not vise versa. This result implies that families do not view children as investments for old age, but as consumption. It also shows that the consumption of child service reduces couple's own consumption significantly not only in the short run but also in the long run. Children are also positively correlated with subsidized housing. A major policy implication deriving from result is the reduction in private child cost through social security, tax credit and subsidized housing for young families.

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