Nope, you are not missing anything. In fact, you have found a problem that I did not realize was there. When originally creating the rules for weapon katas I was a bit more concerned about making katas too powerful.
I wanted katas to improve the damage dealt, but not too much, and I wanted the damage to be based on the MA attack, to show that the weapon was an extension of the martial artist. But this was also prior to breaking out the kata purchase into weapon size, and that is where I made my mistake. I should have reconsidered damage at that point, to base it off the size of the kata weapon, since I am also basing the cost off the size of the weapon.
Proposed Errata
[b]Kata Damage using Melee Weapons[/b]
[list]The that a character wielding a weapon as part of a kata will be based upon the martial art attack used and the kata weapon itself. Normal weapons used as kata weapons will do 1/2 their normal Damage Rate as an add-on to the Base Damage of an attack that utilizes a weapon Kata.
[i]For example, a Hand Strike has a DR of 4. So a style, which uses Speed (bonus of +2) as the stat, and a baton as a kata weapon would, when using the kata weapon, have a Hand Strike that has a Base Damage of 8 (4 hand strike DR + 2 Speed + 1/2 DR of baton (1/2 * 4 = 2))[/i]
[/list]
[b]Kata Damage using Thrown Weapons[/b]
[list]
Base Damage ofr thrown kata weapons will be equal to the Damage Rating of the weapon + 2.
[/list]
How does that sound?