diff --git a/src/server/editorServices.ts b/src/server/editorServices.ts
index 168ecb744b67f..7c50a738c81b2 100644
--- a/src/server/editorServices.ts
+++ b/src/server/editorServices.ts
@@ -4682,7 +4682,6 @@ export class ProjectService {
                 (fileName, eventKind) => {
                     switch (eventKind) {
                         case FileWatcherEventKind.Created:
-                            return Debug.fail();
                         case FileWatcherEventKind.Changed:
                             this.packageJsonCache.addOrUpdate(fileName, path);
                             this.onPackageJsonChange(result);
diff --git a/src/testRunner/unittests/helpers/virtualFileSystemWithWatch.ts b/src/testRunner/unittests/helpers/virtualFileSystemWithWatch.ts
index 7e24e71306d72..4c9e295785be9 100644
--- a/src/testRunner/unittests/helpers/virtualFileSystemWithWatch.ts
+++ b/src/testRunner/unittests/helpers/virtualFileSystemWithWatch.ts
@@ -290,6 +290,8 @@ export interface WatchInvokeOptions {
     invokeFileDeleteCreateAsPartInsteadOfChange: boolean;
     /** Dont invoke delete watches */
     ignoreDelete: boolean;
+    /** ignore all watches */
+    ignoreWatches?: boolean;
     /** Skip inode check on file or folder create*/
     skipInodeCheckOnCreate: boolean;
     /** When invoking rename event on fs watch, send event with file name suffixed with tilde */
@@ -501,6 +503,7 @@ export class TestServerHost implements server.ServerHost, FormatDiagnosticsHost,
         else {
             currentEntry.content = content;
             currentEntry.modifiedTime = this.now();
+            if (options?.ignoreWatches) return;
             if (options && options.invokeDirectoryWatcherInsteadOfFileChanged) {
                 const directoryFullPath = getDirectoryPath(currentEntry.fullPath);
                 this.fs.get(getDirectoryPath(currentEntry.path))!.modifiedTime = this.now();
@@ -628,7 +631,7 @@ export class TestServerHost implements server.ServerHost, FormatDiagnosticsHost,
         this.fs.set(fileOrDirectory.path, fileOrDirectory);
         this.setInode(fileOrDirectory.path);
 
-        if (ignoreWatch) {
+        if (ignoreWatch || options?.ignoreWatches) {
             return;
         }
         const inodeWatching = this.inodeWatching;
@@ -651,9 +654,9 @@ export class TestServerHost implements server.ServerHost, FormatDiagnosticsHost,
         if (isFsFolder(fileOrDirectory)) {
             Debug.assert(fileOrDirectory.entries.length === 0 || isRenaming);
         }
-        if (!options?.ignoreDelete) this.invokeFileAndFsWatches(fileOrDirectory.fullPath, FileWatcherEventKind.Deleted, /*modifiedTime*/ undefined, options?.useTildeAsSuffixInRenameEventFileName);
+        if (!options?.ignoreDelete && !options?.ignoreWatches) this.invokeFileAndFsWatches(fileOrDirectory.fullPath, FileWatcherEventKind.Deleted, /*modifiedTime*/ undefined, options?.useTildeAsSuffixInRenameEventFileName);
         this.inodes?.delete(fileOrDirectory.path);
-        if (!options?.ignoreDelete) this.invokeFileAndFsWatches(baseFolder.fullPath, FileWatcherEventKind.Changed, baseFolder.modifiedTime, options?.useTildeAsSuffixInRenameEventFileName);
+        if (!options?.ignoreDelete && !options?.ignoreWatches) this.invokeFileAndFsWatches(baseFolder.fullPath, FileWatcherEventKind.Changed, baseFolder.modifiedTime, options?.useTildeAsSuffixInRenameEventFileName);
     }
 
     deleteFile(filePath: string) {
diff --git a/src/testRunner/unittests/tsserver/moduleResolution.ts b/src/testRunner/unittests/tsserver/moduleResolution.ts
index f893b95d1255a..b930725d33db9 100644
--- a/src/testRunner/unittests/tsserver/moduleResolution.ts
+++ b/src/testRunner/unittests/tsserver/moduleResolution.ts
@@ -76,14 +76,16 @@ describe("unittests:: tsserver:: moduleResolution", () => {
             const { host, session, packageFile, verifyErr } = setup(jsonToReadableText({ name: "app", version: "1.0.0" }));
 
             session.logger.info("Modify package json file to add type module");
-            host.writeFile(
+            host.modifyFile(
                 packageFile.path,
                 jsonToReadableText({
                     name: "app",
                     version: "1.0.0",
                     type: "module",
                 }),
+                { ignoreWatches: true },
             );
+            host.invokeFsWatches(packageFile.path, "rename", /*modifiedTime*/ undefined, /*useTildeSuffix*/ undefined); // Create event instead of change
             host.runQueuedTimeoutCallbacks(); // Failed lookup updates
             host.runQueuedTimeoutCallbacks(); // Actual update
             verifyErr();
diff --git a/tests/baselines/reference/tsserver/moduleResolution/package-json-file-is-edited.js b/tests/baselines/reference/tsserver/moduleResolution/package-json-file-is-edited.js
index 26deef03b4c40..e1dcef5e5731c 100644
--- a/tests/baselines/reference/tsserver/moduleResolution/package-json-file-is-edited.js
+++ b/tests/baselines/reference/tsserver/moduleResolution/package-json-file-is-edited.js
@@ -244,11 +244,11 @@ ScriptInfos::
         /user/username/projects/myproject/src/tsconfig.json
 
 Info seq  [hh:mm:ss:mss] Modify package json file to add type module
-Info seq  [hh:mm:ss:mss] FileWatcher:: Triggered with /user/username/projects/myproject/package.json 1:: WatchInfo: /user/username/projects/myproject/package.json 2000 undefined Project: /user/username/projects/myproject/src/tsconfig.json WatchType: File location affecting resolution
+Info seq  [hh:mm:ss:mss] FileWatcher:: Triggered with /user/username/projects/myproject/package.json 0:: WatchInfo: /user/username/projects/myproject/package.json 2000 undefined Project: /user/username/projects/myproject/src/tsconfig.json WatchType: File location affecting resolution
 Info seq  [hh:mm:ss:mss] Scheduled: /user/username/projects/myproject/src/tsconfig.jsonFailedLookupInvalidation
-Info seq  [hh:mm:ss:mss] Elapsed:: *ms FileWatcher:: Triggered with /user/username/projects/myproject/package.json 1:: WatchInfo: /user/username/projects/myproject/package.json 2000 undefined Project: /user/username/projects/myproject/src/tsconfig.json WatchType: File location affecting resolution
-Info seq  [hh:mm:ss:mss] FileWatcher:: Triggered with /user/username/projects/myproject/package.json 1:: WatchInfo: /user/username/projects/myproject/package.json 250 undefined WatchType: package.json file
-Info seq  [hh:mm:ss:mss] Elapsed:: *ms FileWatcher:: Triggered with /user/username/projects/myproject/package.json 1:: WatchInfo: /user/username/projects/myproject/package.json 250 undefined WatchType: package.json file
+Info seq  [hh:mm:ss:mss] Elapsed:: *ms FileWatcher:: Triggered with /user/username/projects/myproject/package.json 0:: WatchInfo: /user/username/projects/myproject/package.json 2000 undefined Project: /user/username/projects/myproject/src/tsconfig.json WatchType: File location affecting resolution
+Info seq  [hh:mm:ss:mss] FileWatcher:: Triggered with /user/username/projects/myproject/package.json 0:: WatchInfo: /user/username/projects/myproject/package.json 250 undefined WatchType: package.json file
+Info seq  [hh:mm:ss:mss] Elapsed:: *ms FileWatcher:: Triggered with /user/username/projects/myproject/package.json 0:: WatchInfo: /user/username/projects/myproject/package.json 250 undefined WatchType: package.json file
 Before running Timeout callback:: count: 1
 1: /user/username/projects/myproject/src/tsconfig.jsonFailedLookupInvalidation
 //// [/user/username/projects/myproject/package.json]