Japanese government bonds fell on Wednesday after reports emerged that the country is considering setting a medium-term defense spending target of 3.5% of GDP, aligning with NATO and other US allies. The yield on the 30-year government bond rose 5.5 basis points to 4.12%, while the 10-year yield increased 4 basis points to 3.025%.

The yen weakened 0.3% against the US dollar, trading at 154.82, as the news weighed on market sentiment. Investors are closely monitoring fiscal policy signals, as higher defense outlays could pressure Japan's debt dynamics and prompt further bond selling.

Market participants noted that the proposed spending level represents a significant ramp-up from current defense budgets, potentially reshaping the country's fiscal trajectory. The move, if confirmed, would mark a strategic shift aimed at strengthening national security amid regional tensions, but it also raises concerns about the sustainability of Japan's already substantial public debt.

Traders are now assessing the implications for the Bank of Japan's monetary policy stance, as increased government issuance to fund defense could complicate efforts to normalize interest rates. The bond market's reaction underscores growing caution among investors over the potential fiscal expansion.