FERROUS WEEK: Japan's 'green steel' push gains ground but hurdles remain

The first part of this Ferrous Series provides an updated visualization of steel decarbonization efforts being undertaken across the Asia-Pacific. The second piece takes a closer look at Japan's green transformation, while the third examines how differing interpretations of carbon accounting have emerged to comply with CBAM. The fourth report looks at Simandou's export ramp-up and its impact on iron ore markets, while the fifth explores how the Mongolia-China coking coal trade has evolved. In the final piece, we interview an executive at coking coal trading company E-Commodities.

Japan aims to supply 10 million metric tons of "green steel" and reduce greenhouse gas emissions by 30% from 2013 levels by 2030, as one of five key commitments outlined in the Green Transformation (GX) Basic Policy adopted in 2023.

Aligned with national targets, major steelmakers in the country have set phased decarbonization goals to cut emissions through 2030 and achieve carbon neutrality by 2050, and have made progress in increasing the supply of low-carbon steel through technology development and facility upgrades. However, the full impact of these capital investments is likely to take longer to materialize.

While many steelmakers have reduced emissions from 2013 levels, the improvement has largely come through production controls. Despite ongoing debate over the mass-balance approach, it is widely seen as a transitional measure in Japan.

Looking ahead, Japanese mills are planning to expand electric arc furnace capacity and invest in direct-reduced iron, with additional measures likely to be introduced to further reduce the carbon intensity of steelmaking.

Japanese steelmakers' output and decarbonization progress

Note: Kobe Steel's product scope includes rolled aluminum and copper products.

Source: Company reports

GX steel

Under Japan's Green Transformation framework, the Ministry of Economy, Trade and Industry defines GX steel as "steel with a significant reduction in environmental impact at the enterprise level through additional direct emission reduction actions."

METI also recognizes the added value of GX steel by assuming "added costs for emission reduction actions resulting in a significantly higher price than general products."

Japan has primarily relied on blast furnaces for steel production, accounting for 74% of its crude steel output in 2025, according to the World Steel Association. The Japan Iron and Steel Federation views BF-produced steel with reduction allocations as a transitional measure ahead of the large-scale availability of lower-carbon-intensity steel.

In January 2025, the government revised the Green Purchasing Act to include steel under the mass-balance approach as a priority procurement item. The move further reflected the value of GX steel, driving additional demand from government projects, according to market sources.

While major steelmakers plan to replace BFs with EAFs, the former are expected to continue operating in the coming years, albeit on a diminishing scale.

There are 19 BFs in operation in Japan after Nippon Steel ceased one of its furnaces in Kashima in early 2025 and JFE Steel temporarily banked its Kurashiki furnace in mid-2025, according to data compiled by Platts, part of S&P Global Energy.

Regulations, policies

Demand for low-carbon steel has been steadily increasing, particularly in Japan's domestic market, with the automobile industry leading sourcing, according to market sources.

Toyota Motor -- Japan's largest automaker -- said in its 2025 sustainability report that it is using low-carbon steel from JFE Steel, Kobe Steel, Nippon Steel and POSCO, and that it plans to use scrap-based steel from Tokyo Steel.

More demand from the automotive sector is expected in the broader context of Japan's Clean Energy Vehicles subsidy, under which consumers can receive up to Yen 50,000 (about $312) for vehicles manufactured with low-emissions steel.

Another notable policy is the Sustainability Standards Board of Japan guidelines, which require companies to report gross GHG emissions across scopes 1, 2 and 3. The rules are phased in, starting with companies with market capitalizations of Yen 3 trillion or more in fiscal year 2027-28 (April-March), before the threshold is lowered to Yen 500 billion in FY 2029-30.

As such, domestic low-carbon steel demand is expected to rise as publicly listed companies increase procurement to help reduce Scope 3 emissions.

Green premiums are primarily driven by higher production costs and are typically negotiated on a case-by-case basis. Depending on the supplier and product, premium levels vary widely; most steel offered under the mass-balance approach is priced about $300/mt above normal steel, according to Japan-based industry sources.

JFE Group, in its environmental management strategy briefing, said, "We currently [in 2025] receive a premium of about 40% compared to traditional products."

Meanwhile, Tokyo Steel -- Japan's largest EAF-based steelmaker -- set its green premium at Yen 5,900/mt (about $39/mt) in August 2025, with emissions reduced to 100 kg/mt of steel produced from its usual 400 kg/mt.

With Japan's Green Transformation Emissions Trading Scheme transitioning to a mandatory phase in April 2026, many market participants expect green premiums to become more directly tied to carbon prices, although the effect may be limited in the early compliance years.

"There has been no significant impact from the policy on steelmakers yet, as settlement and costs will only occur in 2027," a Tokyo-based consultant said. "Moreover, low carbon prices in Japan are not really upsetting steelmakers."

The government has proposed a price corridor of Yen 1,700-4,300 ($10.60-$26.90)/metric ton of CO2 equivalent for the early compliance years, which is significantly lower than the EU emissions allowance of Eur79.31 ($92.10)/mtCO2e as of June 2, according to Platts data.

HBI, scrap

EAF and hydrogen-based DRI, identified in steelmakers' decarbonization road maps, could be the ultimate technologies for cutting emissions. For instance, Nippon Steel and JFE Steel both plan to build large-scale EAFs with a capacity of 2 million mt/year each, scheduled to come online by 2030.

With increasing EAF deployments, scrap generation in Japan, particularly high-grade scrap such as shredded scrap and Shindachi, is expected to lag demand growth.

A study by Tokyo Steel estimated Japan's self-sufficiency ratio for high-grade scrap at 87.5%, with a shortfall of 1.48 million mt by 2030. In contrast, the supply of low-grade scrap is expected to be sufficient, assuming steel production volumes in 2030 remain at 2023 levels.

As a result, some market sources expect Japan to export less scrap, or even import scrap, by 2030.

Alternatively, hot-briquetted iron -- a compact form of DRI -- could help address scrap shortages, with steelmakers testing the emissions-reduction impact by charging HBI into BFs and EAFs.

JFE Steel and Kobe Steel have announced plans to invest in and build DRI production capacity in the Middle East, aiming to ship HBI back to Japan for low-carbon steel production around 2027-2028. However, market sources previously said the Middle East conflict may cast doubt on the planned timelines.

Outlook

Japan's aggressive investment in renewable energy and green hydrogen could complement mills' decarbonization efforts and help reduce the carbon intensity of steel products.

However, market participants said government support and policies are crucial to building awareness and public acceptance of low-carbon steel, as demand and customers' willingness to pay are key to scaling it up.