The Japanese Yen, has been falling against the U.S. dollar, and it fell further after Shinzo Abe became the seventh prime minister of the country in the past six years. Jeffrey Gundlach, the founder of Los Angeles-based Doubleline Capital (MUTF:DBLTX), expects the Japanese Yen to collapse eventually because of its inability to service debts, he told Advisor Perspectives

Jeff Gundlach

Gundlach said that quantitative easing in Japan will have a much more harmful effect than the U.S. quantitative easing. The most notable effect will be the debasement of the yen, creating vast opportunities for investors. Japan’s newly appointed prime minister is forcing the Bank of Japan to take every possible measure to beat deflation, that would further affect the yen’s valuation in coming days.

“Clearly, people don’t want to see the economy contract very substantially next year,” Gundlach said. “But, as I’ve said for several years now, addressing the budget deficit equals economic weakness and headwinds, and perhaps if it’s addressed aggressively, that’s just instant recession.”

Gundlach drew parallels between Japan’s situation and the U.S. economy. He said Japan’s two-decade long slow growth and fiscal imbalance acts as a cautionary backdrop for the U.S. policymakers. Of course, Japan is more indebted than the United States. Its national debt is more than double its GDP and the country is still moving in the wrong direction. Japan’s debts have skyrocketed more than half its GDP since 2008.

Gundlach blamed the government spending for Japan’s woes. Rising Japanese imports have created huge trade deficits. Further, its search for foreign sources of energy after 2011 tsunami and its aging population have depressed the country’s current accounts. They all have forced Japan to take more aggressive monetary measures. Gundlach said the country is out of policy tools, and it will first try to create inflation. That’s what the newly elected prime minister has asked the Bank of Japan to do.

Since real rates are still positive in Japan, the country has some room to decrease its interest rates. The probability of lower interest rates conveys a message to investors expecting high-dividend stocks to outperform government bonds. Gundlach cited the 2009 scenario when Japanese stocks yielded better returns than government bonds.

Well, his high-conviction investment idea is that investors should short the Japanese Yen versus the dollar and the euro because of the likelihood of monetary policy easing. He also advised investors to go along the Nikkei because the debasement of the yen will boost exports and benefit Japanese companies. Gundlach expects the Nikkei to rise 2000-3000 points in 2013.