The song is a paraphrase of Psalm 98 written by Isaac Watts (1674-1748) entitled, "The Messiah's Coming and Kingdom." It was first published in Watts' The Psalms of David: imitated in the language of the New Testament, and apply'd to the Christian state and worship (1719). In that book, Watts wrote that he understood Psalms 96-98 to refer to “Christ's Incarnation, his setting up his Gospel-Kingdom to judge or rule the Gentiles, and the Judgment and Destruction of the Heathen Idols.” While he said that in some of his paraphrases of these Psalms he also made mention of Christ’s second coming due to the parallels, he explicitly notes that in his paraphrases of Psalm 98 he refers to what he understood to be the first and chief sense (i.e. Christ’s first coming and present reign).
You can find the book online here. With more context, here is his first comment regarding Psalms 96-98 (p. 248),
In this and the two following Psalms The first coming of Christ into the World is represented in a Prophetic Style, as tho' he were coming the second time to the last Judgment: But that Christ's Incarnation, his setting up his Gospel-Kingdom to judge or rule the Gentiles, and the Judgment and Destruction of the Heathen Idols, is the true Design of these three Psalms, is evident from several Expressions in them and particularly because the Earth, the Fields, Sea, &c. are call'd to rejoice; whereas the final Judgment of the World is represented dreadfull to all Nature, and to the Nations of the Earth. See Rev. 17, and Rev. 20.11, and 2 Pet. 3.7, 10. Yet since this last Coming has some-thing in it Parallel to his first, I have in the different parts of the Psalms referr'd to Both.
And this is his comment inserted in between his two paraphrases of Psalm 98 (the second of which being Joy to the World),
In these two Hymns which I have formed out of the 98th Psalm I have fully exprest what I esteem to be the first and chief Sense of the holy Scriptures, both in this and the 96th Psalm, whose Conclusions are both alike.
I don't think you need to agree with his last argument for his interpretation (the contrast between the ways the comings are described) to agree with the interpretation. After all, all creation groans with hopeful expectation for Christ's return (Rom. 8:19-21). But not only do "several expressions in them" indicate a primary reference to Christ's first coming and the kingdom he then established, but this also makes sense from the perspective of the Psalmist. In agreeing with Watts, I would also point out that the second coming brings to a culmination what was established by his first coming and his current reign.
In this interpretation of Psalm 98, Watts agreed with the interpretations of fellow English nonconformists Matthew Poole (1624–1679) and Matthew Henry (1662-1714). Matthew Poole wrote, "The matter and scope of this Psalm is the same with the former, and is an evident prediction of the coming of the Messias, and of the blessed effects thereof. The psalmist exhorteth Jews, Gentiles, and all the creatures to praise God for his truth and salvation." And while Matthew Henry granted that the end of the Psalm may refer principally to the second coming, yet concerning the Psalm in general, he wrote,
This psalm is to the same purport with the Ps. 96:1–13 Ps. 97:1–12; it is a prophecy of the kingdom of the Messiah, the settling of it up in the world, and the bringing of the Gentiles into it. The Chaldee entitles it a prophetic psalm. It sets forth, I. The glory of the Redeemer, Ps. 98:1–3. II. The joy of the redeemed, Ps. 98:4–9. If we in a right manner give to Christ this glory, and upon right grounds take to ourselves this joy, in singing this psalm, we sing it with understanding. If those who saw Christ’s triumph thus, much more reason have we to do so who see these things accomplished and share in the better things provided for us, Heb. 11:40.
The Son of God took to himself human nature, being born of the virgin Mary, that he might be the last Adam, bringing life instead of death to the world, bringing blessing instead of curse. He was born to die for our sins and rise to life again, establishing his reign now in this earth among the nations of the earth by his word and Spirit. The light is shining more and more, and the darkness is passing away. "The reason the Son of God appeared was to destroy the works of the devil" (1 John 3:8). The purpose and effect of Christ's incarnation give us ample reason to rejoice in it.
For further reflection upon Joy to the World, here is a 4-minute video I made six years ago about this Christmas hymn.

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