Asia Economy

Japan will have a bond default: Fund manager

Japanese government bonds will default: Pro
Japanese government bonds will default: Pro

Tres Knippa believes the troubles in Japan are far worse than they seem, and the fund manager has backed up his pessimism in the form of a leveraged short position against Japanese government bonds.

"They're going to have a default," Knippa told CNBC on Tuesday during an interview with "Squawk on the Street."

Knippa, who runs Kenai Capital Management in Chicago, foresees Japanese officials accelerating debt problems in an ill-fated attempt to protect the country from a bond crisis. If the yen weakens enough, Japanese government bond holders won't hold onto those securities as returns decline along with the yen, he said.

His comments came after Japan's Nikkei stock index ended Tuesday about 14 percent down for the year. Knippa joins noted hedge fund manager Kyle Bass in his opinion on a looming Japanese debt crisis. driven by a stagnant economy and rapidly aging population.

(Read more: Japan's Debt Time Bomb Is Ticking: Kyle Bass)

Japanese investors are now traveling the world looking for investments outside their own currency, Knipp said. He predicts the yen to weaken to 200 to 300 versus the U.S. dollar, as the country's central bank attempts to engineer a steady 2-percent inflation rate after decades of deflation.

Kyle Bass: Japan About to 'Implode' Under Debt
Kyle Bass: Japan About to 'Implode' Under Debt

"Think about what a bond is," Knippa said. "It's an IOU. So if I lend you money in yen and I hold this piece of paper and you're dropping the value, and that's what you're going to pay me back in? No way I'm going to hold the security."

(Read more: How bad will the Nikkei meltdown get?)

Recalling a recent trip to Mexico, Knippa said Japanese investors have bought up land and energy sources there to protect their assets from financial troubles at home.

"Anything they can to get their money out of yen," Knipp told CNBC. "They don't want to sit there and hold yen. They want to try and diversify around the world."

(Read more: Japan's rocky January doesn't deter bulls)

To make matters worse, Japan will see a productivity crisis from its aging population and declining production rates, Knippa said. By 2030, Japan will have three retired people for every person in the workforce, he predicted.

"How in the world is that sustainable?" Knippa said.

—By CNBC's Jeff Morganteen. Follow him on Twitter at @jmorganteen and get the latest stories from "Squawk on the Street." Reuters contributed to this report.