I've picked this game up again on the PSVita the last couple of weeks (with much more luck) and thought I would add to the other answers the importance of
switching weapons throughout the game so that you're building the class affinities appropriately.
As a bare minimum, you want to have at least 3 weapons specializing in a maximum of two adjacent class affinities, which should be swapped around depending on the enemy types you're fighting against so that the affinities will rise and become more powerful against those enemies. What I found the first few times that I played was that I was using a single weapon the entire time, which was causing all of the affinities to average out at between -2 and 2, making them useless against everything.
Elemental affinities are just as important, but the issue of having the wrong element for a weapon can normally be mitigated or dissolved by spells that raise more appropriate affinities temporarily, and / or adding jewels that increase certain elements.
Weapon type again is important but on a much smaller scale. The type also seems to depend on which part of an opponent you are hitting, which gives you more breathing room. For example, Dragons don't like Edged weapons against their tails but they also don't like Piercing weapons against their heads.
As for crafting - I've realized the main goal here is to retain the affinities that you've built up on older equipment made of lower grade materials like Bronze and try combine those high-affinity blades with superior materials that you've found more recently. For example, I've been using a Bronze Polearm as my Human weapon up until now, which I first combined with an Iron sword to convert it to an Iron + Edged weapon (better against Humans). I was then able to combine that with a Hagane sword that I recently found to create a Hagane Greatsword with 40+ Human affinity.
As mentioned at the beginning - as long as you're switching weapons every time you encounter a different class of enemy and sticking to those weapons for the classes you've allocated them to, gameplay becomes much, much easier. I've been doing 40-70 damage the entire way through now instead of 0-2 and Vagrant Story is really enjoyable.