Regulators in Japan recently counseled regional banks that hold massive amounts of Japanese government bonds to shorten the maturity of their holdings to reduce their interest rate risk. That is an indication that in Tokyo even regulators are becoming more nervous about the health of the market.
They are not alone. Sumitomo Mitsui Financial Group has cut the term of its holdings from more than three years to less than two years.
A senior executive at Norinchukin Bank, one of Japan's largest investors, says he is less worried, but that is largely because Norinchukin holds much of the government's issuance of variable rate debt.
Meanwhile, the sparring continues between Masaaki Shirakawa, governor of the Bank of Japan, and Shinzo Abe, opposition leader and the man most likely to become Japan's prime minister after mid-December elections, over whether the BoJ has been aggressive enough in its monetary easing.
"The BoJ is under siege," economists at JPMorgan in Japan noted recently. "The tension between the government and the central bank is set to escalate."
Mr. Abe's preference for an explicit 2-3 percent inflation target has helped drive the yen down to below Y82 to the dollar in the expectation of more asset purchases, possibly even of foreign currency bonds.
That has also led to the expectation that the big exporters will regain their mojo, adverse trade and current account numbers will reverse and the economy will finally rebound.
But in some ways what may be good for the Japanese economy could prove harmful to the market for government debt.
Given that the only real catalyst for growth in Japan has been its exports, what the macro economy requires is a weak yen. But can Japan actually engineer a weaker yen without triggering a rise in yields on its debt?
In the worst case scenario, the slide in the yen could be the catalyst for a rise in yields on Japanese government bonds, a market that is about the same size as the US Treasury market at between $11 trillion and $12 trillion. That in turn could set off a spiral in which non-yen based investors (a mere 8 percent of the demand today, admittedly) insist on higher yields to compensate for possible losses on the currency, while Japanese banks, whose profitability has been minimal, would be looking at losses on their government bond holdings. In most cases, those holdings are larger than the banks' domestic corporate loan books, as deposits from risk-averse households come into their coffers.
Foreigners have been skeptical about the sustainability of the Japanese government debt burden for almost two decades. They have all the charts showing debt is now 220 percent of gross domestic product on a gross basis. Yet, shorting the yen has been the graveyard trade for many hedge funds and some analysts estimate that hedge funds have lost more money shorting Japanese government bonds than on any other trade.
Still, to many the end game feels closer as recent data on the macro side looks ever more dire.
(Read More: What Will Save the Japanese Economy?)
Japan's economy contracted at a 3.5 percent annualized rate for the past quarter and data for October suggest the economy will shrink again this quarter, according to JPMorgan. Exports in the third quarter were down 19 percent on an annualized basis while industrial production was down more than 24 percent. Japan has been running a trade deficit for 19 out of the past 20 months, according to data from Chris Wood of CLSA in Hong Kong, and registered a current account deficit in September for the first time since March 1981. Household savings will evaporate as Japan's population continues to age. But macroeconomic factors have never been the definitive key to understanding what happens in Japan. Movements in the domestic financial markets still reflect the desires of the regulators. If interest rates show signs of moving up, the amorphous "they" will use every lever they can to prevent the debacle.
For example, some perceptive analysts see the decision to postpone the privatization of Japan Post until the autumn of 2015 as a prudential measure designed to give regulators continued access to the captive deposits of its bank arm as another way to support the Japanese government bond market.
At best, though, regulators can only postpone, not prevent. It is a measure of just how far Japan's fortunes have faded that the debate about the future of the government bond market, corporate Japan and the banks is more a question of survival than of profitability.
Time is not on the side either of Japan's aging population or its debt burden.