Yeah, Japanese steel wasn’t great, but they were working with what they had available at the time. Katanas were basically made out of iron dust, which had been melted into slag by filtering through charcoal. The resulting chunks of steel were basically straight up slag, not nice even ingots. So the steel they got was actually extremely high carbon in places, but that also meant it was brittle as hell, because those carbon pockets were prone to shattering.

So the folding was invented, to even out the steel’s carbon content (just like how a Damascus steel blade has visible stripes, Japanese steel had invisible stripes of high and low carbon steel) and to lower the carbon content overall; Every time you heat for another fold, you’re evaporating some carbon. So the folding process took the steel from extremely high carbon pockets to a more evenly distributed carbon content.

Now that modern steel processing exists, the only real reason to stick to the folding method is tradition. There’s no need to fold modern steel ingots because they’re already homogenous and can be produced at whatever carbon level you want.