The long-stagnant trading of Japanese government bonds is regaining vitality, as market concerns over Japan's debt levels drive yields higher.

For two decades, few corners of the global financial markets have been as quiet as Japanese government bonds. Under the Bank of Japan's prolonged policy of keeping borrowing costs near zero, bond yields remained largely stagnant. Over the years, the few contrarian investors who bet on rising yields suffered heavy losses, earning the trade the nickname "widow maker." In the world's second-largest sovereign debt market, benchmark bonds have even experienced entire trading days with zero transactions.

Those days are now over.

Last month, Prime Minister Sana Takaichi's announcement of tax cut commitments sparked concerns about Tokyo's ability to service its massive $9 trillion debt. The yield on 30-year bonds surged by more than 0.25 percentage points in a single trading session—a massive move in a market where daily fluctuations are typically measured in hundredths of a percentage point.

The volatility was so severe that U.S. Treasury Secretary Scott Bessent called his Japanese counterpart seeking reassurance to stabilize global markets shaken by the moves. Yields jumped again last week after Takaichi's party won a decisive election victory, which investors interpreted as a mandate for her high-spending policies.

For Japan's overall economy, surging yields signal potential rapid deterioration. Some economists and investors warn that if yields continue to rise, Japan risks falling into a "debt trap"—where escalating interest payments consume large portions of the budget, forcing the government to borrow more just to service existing debt, creating a vicious cycle.

But for Japanese government bonds and their veteran traders, recent volatility has revived market activity not seen in decades. After long professional hibernation, seasoned traders and strategists—mostly now in their sixties—are returning to the spotlight as global investment firms urgently need their expertise to navigate a genuinely volatile interest rate environment.

"The market has become a battlefield again," said Hiroshi Kubota, 67, who traded Japanese bonds forty years ago and has since authored several books on the subject. "It's exactly like the old days."

Kubota began trading bonds in 1986, when Japan's government bond market had just undergone reforms and officially opened to global investors. During Japan's bubble economy era, Nomura Securities, then the kingpin of Japanese finance, hosted enthusiastic multi-day annual cherry blossom seminars in Kyoto to promote government bonds to foreign central bank officials. The market was thriving.

Throughout the 1980s and 1990s, Japanese bond yields fluctuated wildly with the overall economy. The 10-year bond yield doubled from 4% in 1989 to 8% in 1990, then fell back to 5% in 1992. Investors flocked to capture price differentials. After Japanese government bond futures launched in 1985, they quickly became the world's most traded bond futures.

"It was a party," recalled Hiroyuki Yamaji, 70, CEO of Japan Exchange Group, speaking of the Kyoto gatherings in the 1980s. Before leading the Tokyo Stock Exchange operator, Yamaji spent 36 years at Nomura. Japanese government bonds "were highly profitable products; everyone was trading heavily."

At that time, foreign banks like Goldman Sachs and Salomon Brothers expanded aggressively in Tokyo, poaching traders frantically. U.S. firms offered multimillion-dollar packages to lure top strategists from traditional Japanese banks.

Former bond trader Kubota started a website with a chatroom in the late 1990s, which he says attracted key market figures and Japanese Ministry of Finance officials. He also hosted annual parties on traditional Japanese yakatabune boats, where bond market elites discussed business while cruising Tokyo's Sumida River.

Kubota noted that recent yield volatility "might be shocking for those who have only experienced the past 20 years, but for those who lived through the earlier era, it's not surprising at all."

The stagnation of Japan's government bond market began at the turn of the century.

Following the collapse of Japan's asset bubble and the 1997 Asian financial crisis, the Bank of Japan became the first major central bank in modern times to cut interest rates to zero in 1999. As the central bank began buying bonds to suppress rates, the 10-year yield fell to a historic low below 0.5% in 2003.

For twenty years, policymakers kept rates near zero to combat persistent deflation, leaving yields almost motionless. In 2016, yields even turned negative, meaning investors effectively paid to hold bonds.

"For many years, this was a very difficult market," said Yamaji of Japan Exchange Group. "No one was interested in trading." As daily trading volumes plummeted, formerly aggressive Japanese banks shuttered their bond trading desks, and international institutions significantly scaled back their presence.

According to Yoshiki Kumazawa, a director at Tokyo headhunting firm Morgan McKinley, many veterans left high-paying foreign banks like Goldman Sachs and Morgan Stanley, either entering "semi-retirement" or moving to obscure roles such as research departments at domestic banks.

"We called it 'rejuvenation/skill downgrading,'" Kumazawa said, comparing it to a star player from the New York Yankees being demoted to a Japanese team.

Yamaji made multiple attempts during the 2010s to introduce new trading methods to revitalize the market, but stagnation persisted until 2024. That year, post-pandemic inflation emerged, prompting the Bank of Japan to raise interest rates for the first time in 17 years, triggering a rise in bond yields.

On January 19, after Takaichi supported a tax cut measure costing over $30 billion annually, yields surged again. The following day, the yield on Japan's 40-year bonds broke above 4% for the first time since 2007.

Some view this surge as a warning sign that Japan's debt financing could face difficulties.

Kyle Bass, founder of Dallas-based hedge fund Hayman Capital, staunchly bet during the 2010s that Japanese government bond yields would eventually skyrocket once the debt burden reached a tipping point. Although widely considered the ultimate "widow maker" trade at the time, he admits he didn't profit from it then.

Now, with yields rising and Japan's total debt hitting a record high of $8.77 trillion last year, his logic is becoming harder to ignore.

"The question is: how are they going to hold this together?" Bass said. While borrowing costs are rising in many major economies worldwide, Japan is "about 10 years ahead of everyone else financially." "I'm worried about their situation."

For others, this turmoil represents opportunity. Yamaji noted that daily trading volume in Japanese government bond futures has surged significantly in recent years, with open interest reaching record highs. Kumazawa reported that global hedge funds are aggressively poaching top Japanese talent.

Kubota, the former bond trader and noted market observer, expressed concern about the impact of rising yields on Japan's budget but prefers to view recent volatility as a "canary in the coal mine" rather than the start of a full-blown collapse. At the very least, he expects his annual yakatabune party to be livelier this year.

"It feels like this year will be more exciting than last," Kubota said. "People are finally realizing: the era of interest rate volatility is back."