According to the latest report from the Japanese government, Japan's nominal GDP will increase to 60.9 trillion yen (4.1 trillion US dollars) in 2023, reaching a historic high. Although economic expansion is seen as a positive signal, it also means that Japan needs to invest more funds to achieve its goal of defense spending accounting for 2% of GDP by 2027.

If the Japanese economy continues to grow, the proportion of defense budget in GDP may shrink, thereby affecting the achievement of this goal.

Japan's current defense budget accounts for 1.4% of GDP, and to achieve the target of 2%, an increase of approximately 43 trillion yen is required within five years. But the US government's stance is more radical, with Elbridge Colby, the defense policy official nominated by the Trump administration, stating at a Senate hearing that Japan should increase defense spending to 3% of GDP, which means an additional 9 trillion yen in military spending is needed.

Japan will decide on its own the scale of defense spending and will not base it on the requirements of other countries. "- Japanese Prime Minister Shigeru Ishiba

The Japanese government has encountered resistance in formulating the budget for the next fiscal year, as the opposition party has called for increased social spending and the budget has been revised for the first time in 29 years.

Meanwhile, Japan has pledged to invest 43 trillion yen in military expansion over the five-year period of 2022-2027, breaking the traditional policy of spending no more than 1% of GDP on defense.

Japan's 30-year treasury bond bond yield rose to the highest level since 2006, indicating that investors are worried about the future growth of government debt;

Market analysts believe that Japan may further increase its military spending due to pressure from the US, which could lead to a widening fiscal deficit and affect long-term economic stability

Japan may be forced to increase military spending when weighing the threat of higher tariffs. This has a significant impact on the fiscal market, and bond investors need to closely monitor it. "- Ataru Okumura, Senior Interest Rate Strategist at SMBC Nikko Securities

Due to the expansion of fiscal expenditures and debt growth, the Japanese yen has been continuously weakening against the US dollar in recent times. The market is concerned that the government may adopt more loose monetary policies to meet higher defense spending demands, leading to further depreciation of the yen.

The rise in the yield of Japan's long-term treasury bond may prompt investors to reduce their demand for safe haven yen and turn to other safe haven assets.

The market is paying attention to the future monetary policy of the Bank of Japan (BOJ). If government debt grows too fast, it may force the BOJ to continue maintaining a low interest rate policy, further weakening the yen.

The market is currently paying attention to the trend of the Japanese yen, and if Japan's fiscal spending continues to expand, it may exacerbate the depreciation pressure on the yen. "- IG market analyst Tony Sycamore

Against the backdrop of global financial market turbulence and escalating geopolitical tensions, investors tend to hold more stable assets such as the US dollar, which puts additional pressure on the Japanese yen.

George Glass, the nominee for the US Ambassador to Japan, emphasized during a Senate hearing that the US hopes Japan will "increase military spending" and plans to discuss this with the Japanese government;

In the past, the US government has repeatedly demanded that its allies bear more defense costs, and the current pressure may force the Japanese government to further adjust its fiscal budget in the coming years.

Future prospects:

Increased financial burden: The increase in defense spending will further push up government debt, posing a challenge to long-term fiscal stability.

Bond market fluctuation risk: investors have begun to worry about the expansion of Japan's fiscal expenditure, and the future treasury bond bond yield may continue to rise, affecting the stability of the capital market.

Pressure on the yen trend: If the government adopts more fiscal stimulus measures or further expands the deficit, the yen may continue to depreciate, affecting import prices and consumer spending.

Overall, although the growth of the Japanese economy is beneficial to the overall fiscal situation, the accompanying pressure of military spending growth, debt problems, and the depreciation of the yen may constrain long-term economic stability.