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Total stocks dropped 2.7% month-on-month to 6.33 million tonnes in March, according to the Japan Iron and Steel Federation (JISF).
This is the lowest level since early 2011 and comes as producers slashed their stockpiles by 4.9% to a multi-year low of 4.93 million tonnes.
Shipments were at 6.94 million tonnes, the highest since March 2012, driven largely by an increase in exports on the back of the weaker yen.
One official said shipments always tend to rise sharply in March before the fiscal year-end, and that on a year-on-year basis, domestic shipments were still down by over 2%.
But he added that there is a general feeling that the recovery in demand would continue to gather pace, albeit in an unbalanced way. Growth in the construction sector is still outstripping that in manufacturing, he noted.
The fall in producers' stockpile levels came despite them raising output by 17.9% from the previous month to 6.76 million tonnes, the highest volume since at least July 2011 as shipments increased by 18.1% to 6.94 million tonnes.
This included a 22.3% increase in exports to 2.67 million tonnes, as a government strategy to weaken the yen helped exporters.
Export volumes were also up 3.2% year-on-year and have now posted year-on-year rises for nine consecutive months.
Domestic shipments rose 15.5% on the month to 4.27 million tonnes.
Japanese steel stockpiles have dropped to multi-year lows after shipments rose to the highest level in a year amid a rebound in domestic and export demand.