The oil refining industry may be forced to cut about 10 percent of capacity as the government is set to impose new targets to improve efficiency and spur restructuring and mergers.

Refiners will be required to increase the volume of high-value fuels such as gasoline and diesel they produce in relation to the output of low-quality byproducts by either renovating their facilities or reducing oil-processing volumes, according to a draft of the Ministry of Economy, Trade and Industry's rules released Monday. The new targets may force them to cut about 400,000 barrels a day from the country's current 3.95 million a day of capacity, the ministry said.

"The refining industry is very likely to fall into a state of serious oversupply" without measures including cutting excess capacity, METI said in the report.