Toyota Motor Corp's <7203.T> biggest quarterly profit in two years and a hike in its annual forecasts failed to allay concerns about the strength in the yen, weak margins and a faltering U.S. market.

Toyota joined rival automakers from Ford Motor Co to Hyundai Motor Co <005380.KS> which have also posted forecast-beating quarterly results, but executives have been united in their cautious view of the global economy for the rest of the year.

Toyota's new guidance for operating profit to total 330 billion yen ($3.85 billion) in the year to March 31, 2011, is still far short of a consensus 526.5 billion yen in a survey of 21 analysts by Thomson Reuters I/B/E/S.

The prospect of an economic slowdown in North America is the biggest concern for Toyota, said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

Its first-quarter results were solid but its upgrading of its fiscal year forecast was below consensus, so they are keeping a cautious stance.

Toyota, the world's largest automaker, said earnings were boosted by strong profits at its finance division and warned it was anticipating a tough second half for sales, while costs would also rise.

MARGIN WOES

After the financial crisis hammered car demand globally, Toyota has been plagued with excess production capacity, putting pressure on margins.

The crisis that forced Toyota to recall more than 10 million vehicles for problems with unintended acceleration and braking issues compounded those woes, costing the company billions of dollars and tarnishing its image.

President Akio Toyoda has vowed to put the recall debacle that has monopolized his first year as chief executive behind him, calling 2010 a fresh starting line for the 73-year-old company founded by his grandfather.

But in the coming quarters, Toyota is set to get the double blow of crumbling domestic sales and a stronger-than-assumed yen, which makes exports less competitive and reduces the value of profits made overseas.

Toyota expects to export around 60 percent of its Japan-made vehicles this year -- a higher ratio than at rivals Honda Motor Co <7267.T> and Nissan Motor Co <7201.T>.

Toyota kept its dollar assumption at 90 yen, a figure described by some analysts as aggressive, but cut its euro forecast to 112 yen versus 125 yen.

There's a lack of visibility regarding currency movements and it's difficult to predict how big an impact the end of Japanese subsidies will have, Senior Managing Director Takahiko Ijichi told a news conference.

We're factoring in a big impact on profits from weaker volumes in the second half.

SUBSIDIES ENDING

Japan's incentives to replace old cars with fuel-efficient ones have shored up domestic production in the past year, but those subsidies will expire in September. Toyota has been a major beneficiary since the subsidies favor hybrid cars like its best-selling Prius.

And with a U.S. sales recovery looking slower than anticipated, Toyota has said it may be a few years before its operations in Japan could break even.

Toyota's U.S. sales in July slipped 3 percent, albeit from strong results a year earlier, and trailed a 5 percent rise in overall sales, data on Tuesday showed.

For the April-June quarter, the maker of the Corolla sedan reported an operating profit of 211.7 billion yen thanks to a sharp rise in vehicle sales, swinging from a loss of 194.9 billion yen a year ago.

Toyota is still suffering from the impact of its safety recalls, with profit margins also under pressure because of higher sales incentives to attract U.S. customers. It said it wanted to cut U.S. sales incentives by 10-20 percent in the coming months.

Toyota's first quarter margin was 4.3 percent, compared with Nissan's 8.2 percent and Honda's 9.9 percent.

First-quarter net profit, which includes earnings made in China, was 190.5 billion yen, compared with a loss of 77.8 billion yen a year earlier.

Shares of Toyota have fallen about 22 percent in the year to date, faring worse than Tokyo's main TOPIX index <.TOPX>, which lost 17 percent in the same period.

Toyota's shares closed down 1.6 percent before the results were announced on Wednesday, against a 2.1 percent fall in the broader Tokyo market <.N225>.

($1=85.80 Yen)

(Editing by Lincoln Feast and Jean Yoon)

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