The 31-year old striker, whose goal against Iraq last month put the Socceroos into the World Cup, has been selected by Osieck for the tournament to be held in South Korea later in July but Nagoya have not given him permission to play.
"Nagoya created a number of problems for us in not releasing Josh Kennedy," Osieck said.
"I had a chat with [Nagoya Grampus coach Dragan] Stojkavic and he agreed to let him play but right away we got a letter from the club denying the release. It's not a good situation and I don't accept it."
Australia take on hosts South Korea in Seoul on July 20 ahead of their July 25 meeting with arch rivals Japan in Hwaseong and July 28 clash with China.