diff --git a/src/vs/base/common/objects.ts b/src/vs/base/common/objects.ts
index ee357967364036..d1125e67040e75 100644
--- a/src/vs/base/common/objects.ts
+++ b/src/vs/base/common/objects.ts
@@ -168,14 +168,18 @@ export function equals(one: any, other: any): boolean {
  *  "Uncaught TypeError: Converting circular structure to JSON"
  */
 export function safeStringify(obj: any): string {
-	const seen = new Set<any>();
-	return JSON.stringify(obj, (key, value) => {
-		if (isObject(value) || Array.isArray(value)) {
-			if (seen.has(value)) {
+	// Track only current ancestors so shared sibling references are serialized in full.
+	const ancestors: unknown[] = [];
+	return JSON.stringify(obj, function (this: unknown, key: string, value: unknown) {
+		if (typeof value === 'object' && value !== null) {
+			// `this` is the object holding `key`, pop the subtrees that are already done
+			while (ancestors.length > 0 && ancestors[ancestors.length - 1] !== this) {
+				ancestors.pop();
+			}
+			if (ancestors.includes(value)) {
 				return '[Circular]';
-			} else {
-				seen.add(value);
 			}
+			ancestors.push(value);
 		}
 		if (typeof value === 'bigint') {
 			return `[BigInt ${value.toString()}]`;
diff --git a/src/vs/base/test/common/objects.test.ts b/src/vs/base/test/common/objects.test.ts
index ab8018857f7649..9909e38c072c22 100644
--- a/src/vs/base/test/common/objects.test.ts
+++ b/src/vs/base/test/common/objects.test.ts
@@ -134,13 +134,22 @@ suite('Objects', () => {
 						friend: '[Circular]'
 					}
 				},
-				'[Circular]'
+				{
+					friend: {
+						friend: '[Circular]'
+					}
+				}
 			],
 			d: [1, '[Circular]', '[Circular]'],
 			e: '[BigInt 42]'
 		});
 	});
 
+	test('safeStringify does not treat shared references as circular', () => {
+		const shared = { a: 1 };
+		assert.strictEqual(objects.safeStringify([shared, { x: shared, y: [shared] }]), '[{"a":1},{"x":{"a":1},"y":[{"a":1}]}]');
+	});
+
 	test('stableStringify', () => {
 		// Stable key order regardless of insertion order
 		const a = { b: 1, a: 2, c: { y: 1, x: 2 } };