Japan Weighs Defence Spending at 3.5% of Output as Long Bond Yields Sit at Multi-Decade Highs

Japan is considering a medium-term target to raise defense spending to 3.5% of gross domestic product over ten years, a level in line with what the United States has urged its allies to adopt. Takuji Aida, chief economist at Credit Agricole and a member of a panel advising Prime Minister Sanae Takaichi, said the increase would be spread over many years and should not become a source of significant market anxiety in any single year, describing it as a goal for the next ten to fifteen years.

Bond investors have already reacted. Reports that Tokyo was weighing the 3.5% figure under American pressure were followed by Japanese thirty-year yields reaching their highest level in three decades, according to Eastern Herald. Nikkei Asia has since reported that Takaichi has grown more cautious about committing to any output-share target.

The military buildup is proceeding regardless of how the spending target is framed. The Typhon midrange missile system, deployed to Japan for joint exercises, will be stored indefinitely at Kadena Air Base in Okinawa from mid-October. That is a concrete change in posture, and it is the kind of commitment that generates recurring budget obligations rather than one-off procurement.

The underlying tension is straightforward. Japan carries the largest government debt burden among advanced economies, the Bank of Japan is withdrawing from its policy of suppressing bond yields, and any durable increase in defense spending must be financed either through issuance into a market that has already repriced long-term debt higher, or through taxes that would slow the growth Takaichi has promised.