The Government has delivered a message of tacit support to the president of J-Power before a potentially explosive showdown this week between the Japanese utility and the UK-based Children’s Investment Fund (TCI). A letter, obtained by The Times, includes a veiled snub to TCI, which has used its 9.9 per cent stake in J-Power to make a sustained attack on the Japanese utility and its supposed lack of concern for its shareholders.

TCI’s conflict with J-Power, which amounts to a straightforward demand for bigger dividends, has become increasingly acrimonious, spiralling into a wider shareholder harangue against standards of corporate governance in Japan. In anticipation of this week’s annual J-Power shareholder meeting, TCI has proposed a doubling of the dividend from last year’s 60 yen a share to Y120 and has been fomenting a shareholder rebellion against the J-Power management.

A proxy battle is now expected, with both foreign and Japanese investors lining up on both sides. J-Power has offered a small rise in dividend, but has consistently argued that TCI’s calculations of the appropriate payout do not take proper account of the utility’s long-term investment needs. As TCI’s paper losses on its J-Power stake have grown, so too have the gambits used by both sides.

TCI attempted to raise its holding in J-Power to 20 per cent, but was blocked by the Japanese Government, which said that, for national security reasons, no foreign fund should be allowed to hold such a powerful stake in a key utility.

Chris Hohn, the head of TCI, lobbied the European Commission to take up its cause and in April, Peter Mandelson, the Trade Commissioner, used a speech in Tokyo to condemn Japan as the most closed developed market in the world. When the Japanese Government formally banned TCI from raising its stake, Mr Hohn wrote to John Hutton, the Business Secretary, and Lord Jones of Birmingham, Minister for Trade and Investment, demanding that Britain impose trade sanctions on Japan. Disturbed by this development, Yoshihiko Nakagaki, J-Power’s president, also wrote to both ministers expressing his concern.

Mr Hutton’s letter of May 29 offers a tacit guarantee that Britain will not take up Mr Hohn’s suggestion of trade sanctions. “We see building fair, open and well-regulated energy markets as the best way to encourage investment, develop the most efficient and cost- effective solutions and provide greater access to these critical markets,” he wrote. “We do not believe that the most effective way to encourage this progress is to threaten trade and investment sanctions.”

Mr Hutton adds that he can understand the Japanese Government’s position, concluding: “I fully appreciate that the Japanese authorities have undertaken due process in reaching their decision regarding TCI. I am also sure they had in mind the impact (positive or negative) any decision they made would have on the perception of Japan as an investment destination.”

TCI’s attacks have coincided with growing disquiet among foreign investors in Japan, where hundreds of companies have adopted poison-pill takeover defence strategies and added an extra layer of protection by establishing complex “cross shareholdings” with friendly companies.

However, many veteran investors believe that TCI chose the wrong type of company to engage in an activist campaign, given the relative ease with which the Japanese Government could declare that J-Power’s business represented a “strategic” asset. As an electricity wholesaler, J-Power is responsible for keeping the lights on in Tokyo and for building the infrastructure of Japan’s nuclear reprocessing industry.

Outside Japan, TCI’s reputation has taken a hit. It has been taken to court and accused of illegally building a holding in CSX, the American railway company, by stealth.

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