How did the Japanese not figure out the Navajo Codetalkers in WWII? What did they think it was?

how did the Japanese not figure out the Navajo language

Do you mean, how did they not figure out it was Navajo, or how did they not break the code once they did? They did figure out it was Navajo rather quickly, but the code was extremely complicated. For example, the Navajo words ""ah-jah," "dzeh," and "ah-nah" ("ear," "elk," and "eye") all represented the English letter "E", but "a-ye-shi" (eggs) meant "bomb." Each English letter had three Navajo words assigned to it (except for L, N, S, and U with two and Q, V, W, X, Y and Z with one), and then there were more than 200 replacement words (like "potato" for "grenade"). A Navajo named Joe Kieyoomia, who was not involved with the Code Talkers, was captured and tortured into translating some of the messages. However, none of them made any sense, to the degree that he even told them it was just gibberish. I'm not too up on efforts to crack the code, as my research was about the Talkers, but it's telling that even with the (coerced) help of a Navajo translator, they could not break it.

was the Navajo language so insular that no one outside the US could speak it? And do people outside the US know it today?

The Navajo language is so insular that few people inside the US speak it. It's the most widely spoken Native language in America today, with about 170,000 speakers (of nearly 300,000 enrolled tribal members), but that's nothing in a nation of more than 310 million. It's an extremely complicated language that makes use of a number sounds that simply don't exist in English, making it very difficult to learn if one isn't raised with it. Chester Nez, one of the original 29 Code Talkers, said "emphasis on the wrong syllable, a slight change in tone, or a glottal stop could totally change a word's meaning [...] Several white Marines who'd grown up on the Navajo Reservation and knew quite a bit of Navajo later applied to code talker school. But there were always words or syllables they could not pronounce correctly, so they didn't make it as code talkers." In 1942 only about 30 non-Navajos spoke it, and most of them were traders, missionaries, or their children (and as Nez demonstrates, they didn't speak it fluently).

Sources: Chester Nez, Code Talker; http://www.archives.gov/publications/prologue/2001/winter/navajo-code-talkers.html