Unlike earlier crises in Japan's banking sector, this time the turbulent situation is likely to impact global markets. A leading hedge fund manager sees collapse in the Japan's banking industry blindsides the market. However, he ruled out any possibility of banking crisis in the world's third largest economy.

Shannon McConaghy, a portfolio manager at Horseman Capital Management, says "It'll be Japan's banking industry collapse that blindsides the market." Horseman capital is a London-based $2.75-billion hedge fund. McConaghy sees Japan moving through risk-off environment.

"I do think there will be a banking crisis in Japan," McConaghy told Business Insider. The Japanese market is shying away from risk assets as it's moving towards safe assets. Hence, ongoing risk-off indicates safe assets rally in the market. Going by historical track record, Japan tends to decline more than markets move in risk-off mode.

McConaghy further explains "We have seen Japan have banking crises in the past without destroying global economic trends. But, at this moment I think the emerging market fragility and low growth could see a crisis in Japanese banks trigger sustained risk-off in global markets, particularly given the importance of Japan as the world's largest net foreign creditor."

The last four major risk-off environments were Asian financial crisis, tech bubble, global financial crisis, and euro crisis. During these risk-off environments, Japan fell more than the world's average. McConaghy manages Horseman Capital's Japan-focused fund. He's bearish among bulls on Japan's market as it tends to fall more than other global markets during risk-off phase, as reported by Yahoo Finance. 

McConaghy in his February performance update said "Regional banks remain the fund's largest short grouping. Investors I meet tend to think they have missed the opportunity to short Japanese regional banks. I feel there is substantial downside remaining as real earnings and book values are likely negative for many. They are poorly understood with limited analyst coverage and are very non-consensus shorts with limited reported short interest."

Japanese banks are currently suffering from flat margins in the wake of economy slowdown. The Bank of Japan has even reduced its interest rates into negative territory while Japanese currency Yen fell 4.2 percent. Markets and investors are looking to the Bank of Japan's decision. Majority of economists predict it may leave the deposit rate on excess reserves at negative -0.1 percent, according to Financial Times.

Horseman Capital's Japan-focused fund has about $24 million assets under management right now. It started trading back in December 2015. The fund recorded a growth of 11.57 percent in February 2016 and was last up 17.06 percent year-to-date. The fund has been on short Japanese equities, with the largest short being Japanese regional banks.