A nearly record-high yen and devastating floods in Thailand have forced Nippon Steel Corp and JFE Steel Corp , Japan's top two steelmakers, to curtail exports.
The strong yen has also opened the door for cheaper imports from Asian rivals like South Korea's POSCO and Baosteel of China.
December marked the fourth straight month of year-on-year declines, and was the sharpest year-on-year fall since 12.8 percent in October 2009.
Output in 2011 fell 1.8 percent to 107.59 million tonnes, and the government forecasts output to continue falling in the first quarter.
Japanese demand for crude steel is expected to fall 6.2 percent from a year earlier to an almost two-year low of 26 million tonnes in January-March, as the plunge in steel exports outweighs strong demand from the domestic auto sector, the trade ministry said last month.
The ministry estimates Japan's annual crude steel output for the fiscal year ending in March at 105.92 million tonnes, down 4.87 million tonnes, or 4.4 percent, from the previous year.
Many Japanese manufacturers, which have placed part of their supply-chains in Thailand, have reduced output in the wake of the flooding, resulting in a drop in demand for Japanese steel. Japan exports about 400,000 tonnes of steel to Thailand a month.
But demand from domestic manufacturers is expected to stay solid, showing a recovery from the March 11 earthquake, which disrupted domestic supply chains and cut output.