The government on Wednesday rejected a U.K.-based hedge fund's request to raise its stake in Japan's largest electricity wholesaler, citing a potential threat to national security.

The move, however, raised questions in the market about Japan's willingness to open up to foreign investors.

The Children's Investment Fund, or TCI, was seeking to raise its stake in Electric Power Development Co., known as J-Power, from the current 9.9 percent to 20 percent. TCI is already the largest shareholder in J-Power.