Honda Motor Co is studying possible production bases overseas to replace export-bound car production in Japan that has been battered by a strong yen, a top executive said on Tuesday.

Japanese auto executives have repeatedly warned that the yen had strengthened beyond what domestic exporters could cope with, but Honda Chief Financial Officer Fumihiko Ike's comment was the first indication so far that any concrete steps are being considered to reduce output in Japan.

We currently have a three-year plan under which we are assuming a rate of 80 yen to the dollar, Ike told a small group of reporters at Honda's headquarters in Tokyo.

And under that assumption, the discussion to look for an alternative production base is inevitable.

Ike tempered his comments by stressing that jobs in Japan needed to be protected, and that the discussion would continue right up to the point when the board makes a formal decision, taking into account exchange rates at that time.

But he said he was not necessarily optimistic that the yen would weaken, and that Honda was bracing itself for further appreciation toward 70 yen to the dollar after Japan's solo intervention last week did little to stem the dollar's fall. The U.S. currency was fetching around 77.00 yen on Tuesday.

Protecting Japanese manufacturing and building cars here is becoming more and more difficult, Ike said. We can keep the technology here, but if we were to build cars in Japan, they may be good (quality) products but they would be too expensive. And an expensive product is not necessarily a good product.

EXPORT EXPOSURE

Among Japan's top automakers, third-ranked Honda is the least exposed to excessive domestic production, exporting just 30 percent of its Japan-made cars last year. Toyota Motor Corp exported 53 percent, while Nissan Motor Co shipped 59 percent.

All three automakers have a basic strategy of creating a natural hedge against currency swings by producing as many cars as they can where they are sold. But for smaller markets where demand is insufficient to build a factory, production has been concentrated in Japan.

At these exchange rates we lose competitiveness on these exports, and that leads to a fall in sales, triggering a vicious cycle, Ike said. And when that happens, the natural consequence is for that production (in Japan) to disappear.

Ike said Honda had already gone down that path with motorcycles, expanding production in India, Vietnam and Indonesia. Honda imports many motorcycles into Japan from Thailand and China.

If Honda takes a similar step with cars, it could put pressure on rivals Toyota and Nissan to do the same and lead to a hollowing out of Japanese manufacturing, one of the main drivers of the country's economy.

Toyota and Nissan have been more vocal than Honda about protecting domestic production, with Toyota pledging 3 million vehicles a year of output in Japan and Nissan pledging 1 million.

Nissan said this week it plans to boost its sales in the shrinking Japanese market to keep the 1 million annual production target as it shifts more export-bound output overseas.

Car makers are trying hard to cut costs to absorb the currency impact, but there's a limit to the speed and scope of what they can achieve, said Credit Suisse auto analyst Issei Takahashi.

Even if they build a lot in Japan, if they lose money by doing so they won't be able to protect jobs. I think it's inevitable that some production shifts overseas.

(Editing by Edmund Klamann)

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