The Portuguese, 46, has taken over at Ibrox after signing a three-year contract.
"They need to spend some money to bring in better players to try to bridge the gap," said Johnston, who played for both Celtic and Rangers.
"It's a huge gap, how many points is it at the top of the championship, 33?"
Defending champions Celtic are within two wins of a sixth straight top-flight title while Rangers, who won promotion last season, trail second-placed Aberdeen by eight points with 10 games to play.
While Johnston, 53, says Caixinha's appointment is a risk, the former Scotland striker believes the manager's three-year spell in Mexico with Santos Laguna will help him as he adjusts to the demands of Scottish football.
"It's a big gamble, [Caixinha] doesn't really know much about Scottish football," said Johnston, who lives in the United States and previously managed New York Red Bulls and Toronto.
"I don't think you can prepare yourself for the Old Firm.
"He was in Mexico - which is very similar to Major League Soccer - for three years, [and] he won three trophies.
"I don't think you can compare the MLS and Mexico to the Premiership [because the] MLS is a little bit better.
"He's a good coach, but he needs investment, that's all he needs."
Johnston expected Rangers to lose on their visit to Celtic Park on Sunday and says the Ibrox side will take plenty of belief from their hard-fought performance for when the two sides meet again in April's William Hill Scottish Cup semi-final.
"It was a great draw, because they're so far behind in the Premiership," Johnston added. "They'll take a lot [of confidence from it].
"When I was coming back [to the UK], you're thinking Celtic are going to run away with it, but the game was a little bit different. Rangers played well in the last 20 and deserved the draw.
"You need a strong Rangers for Scottish football to survive. Celtic are running away with it right now."
Maurice Johnston believes new Rangers manager Pedro Caixinha "needs investment" to close the gap on rivals and Premiership leaders Celtic.