Japan has blocked a bid by a British hedge fund to increase its stake in the country's biggest power wholesaler - citing national security legislation.

The London-based Children's Investment Fund wanted to up its 9.9% holding in Electric Power Development Company - or J-Power - to about 20%.

But Japan's finance and trade ministers "recommended" that the proposed move should be abandoned.

It was the first time the law had been used to refuse foreign investment.

Under the legislation, overseas investors must get government approval before building a stake of 10% or more in a firm considered important for national security and maintaining public order.

Allowing the fund to raise its stake in J-Power would have "a negative impact on stable supply of electricity and our national policies on nuclear power," the ministers said.

Investment debate

But the head of the investment fund's Asian operations, John Ho, said that the decision would have "profound implications for the Japanese energy sector".

"The ability to attract investment into the sector in the long term is now severely curtailed," he said.

"Japanese assets will also be undervalued because legitimate capital has been turned away."

However, the Japanese government insisted that foreign investment would be unaffected.

"There is no room at all for the argument that Japan is closed," a spokesman said.

"It is something that any country is doing in a very limited manner in areas that concern national security such as electric power, nuclear power generation and power supply."