Canon Inc posted better-than-expected quarterly profits and raised its annual forecast after it staged a rapid recovery from supply chain woes sparked by the March 11 earthquake.

Canon, which competes with Sony and Nikon in digital cameras and with Xerox and Hewlett-Packard Co in office equipment, on Monday revised its full-year profit forecast up to 380 billion yen from 335 billion yen.

These favorable results will support the share price, which will be solid for the time being, said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities.

But the trend toward a higher yen continues to be a source of uncertainty.

Canon said the strength of the yen had cut operating profits by 16.4 billion yen in April-June, but added it would be hard to shift more production abroad to mitigate the effect of exchange rates.

Our manufacturing is clearly divided between domestic and foreign processes and we already do labor intensive work such as assembly overseas, Chief Financial Officer Toshizo Tanaka told reporters.

It is difficult for us to make changes just because the exchange rate has shifted dramatically, he said, urging the government to send a clear message about exchange rates.

The world's biggest camera maker set assumed rates of 80 yen to the dollar and 115 yen to the euro for July-December, compared with current rates of around 78 yen and 112 yen, respectively.

Current exchange rates are higher than their assumptions, which could weigh on the stock price, Yamagishi added.

Canon's April-June operating profit came to 78.4 billion yen ($1 billion), higher than an expected profit of 55.9 billion yen, the average of six analysts polled by Thomson Reuters I/B/E/S, but lower than the 113.4 billion yen it booked for the same quarter last year.

The world's biggest maker of digital cameras in April slashed its annual operating profit forecast to 335 billion yen from 470 billion yen following the devastating earthquake and tsunami.

On Monday, it nudged up its shipment forecast for interchangeable lens cameras to 7.3 million units from 7 million, but kept its 20 million unit forecast for compact cameras unchanged.

Market expectations are for an annual profit of 365 billion yen, based on the average forecast of 18 analysts polled by Thomson Reuters I/B/E/S.

Also hurt by the quake, rival Xerox last week warned it would have less operating cash than expected this year.

Shares in Canon ended at 3,785 yen on Monday, unchanged ahead of the results, compared with a 0.9 percent fall in the broader Nikkei average.

The company's shares are down little more than 1 percent on the March 10 close, having recovered almost all the losses sustained in the aftermath of the earthquake.

($1 = 78.355 Japanese Yen)

(Additional reporting by James Topham and Hirotoshi Sugiyama; Editing by Edwina Gibbs and Vinu Pilakkott)

Quake