Mammoth Japan Stimulus Still Not Enough: Hayman's Bass

The gargantuan stimulus Japan is pumping into its economy will have to be even larger to achieve the desired results, said Hayman Capital founder Kyle Bass.

"They're going to have to make the plan even bigger than they said if they're going to successfully contain rates," Bass told CNBC's "Squawk on the Street."

The reason is the "rational investor paradox," said the hedge fund honcho who has been outspoken in his criticism of Japan's fiscal policies. "If Bank of Japan investors believe in Abenomics and (BOJ Gov. Haruhiko) Kuroda's plan to double the monetary base in the next couple years and generate some inflation and growth, then a rational investor who holds their bonds is likely to sell a portion if not all of them," Bass said.

(Read More: Bank of Japan Policy Is Huge, Risky Experiment: Fund Manager)

Bass said he saw it first-hand. "After being in Japan last week, I think that many investors are believing that the BOJ will be at least partially successful in generating some growth—so the rational investor will sell some bonds," he said. "There's a quadrillion yen in bonds out there. If 5 percent of them get sold, that's 50 trillion yen. So it doesn't look to me like the plan is big enough."

According to a plan announced April 4, the Bank of Japan will buy 60 trillion yen ($590 billion) in bonds both this year and next.

"They're going to run a fiscal deficit of 50 trillion yen this year, or 10 to 11 percent of GDP," he said. "That means they'll have only a 10 trillion yen cushion to buy more bonds," he said.

(Read More: Bank of Japan Keeps Policy on Hold, as Expected)

The market reaction is apparent, he said. "Look at the three biggest banks in Japan. ... You're seeing rational investors start to sell (Japanese Government Bonds) and buy foreign bonds or even Japanese equities with the money."

Bass made his name as an investor by predicting and benefiting from the subprime mortgage crisis.