Toyota Motor Corp <7203.T> forecast a slower-than-expected recovery in earnings this year as a stronger yen and Europe's debt problems hamper efforts to undo the damage from the worst recall crisis in its history.

The world's largest automaker comfortably beat forecasts with a fourth-quarter profit on Tuesday as it cut costs and its aggressive sales incentives swiftly drew U.S. customers back to its popular Prius hybrid and Corolla sedans in the wake of its recall woes.

But its projection for a 280 billion yen ($3 billion) operating profit for the year to end-March 2011 was little more than half the consensus market forecast for 546 billion yen.

The forecast is really quite weak compared to the consensus, but given their overall situation right now I don't think they could really put out a strong forecast, said Hiroaki Osakabe, a fund manager at Chibagin Asset Management in Tokyo.

The biggest risk I see for next year isn't just limited to Toyota; it's really more whether the global automobile market will hold up once all the rebate schemes expire.

Rivals such as Honda Motor Co <7267.T> have also given cautious forecasts citing uncertainty over raw material prices and difficulty in getting a read on car sales after government subsidies to stimulate demand end in Japan and other markets.

Third-ranked Nissan Motor Co <7201.T> reports its earnings on Wednesday.

Toyota has the extra burden of unknown legal costs and spending on promotions to entice buyers after recalling some 8 million vehicles globally since last October to fix sticking accelerator pedals.

Some lawyers estimate Toyota faces potential civil liabilities of more than $10 billion in U.S. courts alone.

And it may face further federal fines, with U.S. safety regulators opening a fresh investigation over whether the automaker had delayed action to address complaints about certain steering system parts on Hilux pickup trucks.

RETURNS TO PROFIT

Still, Toyota's weathering of the recall storm and earnings recovery exceeded its and analysts' expectations.

Toyota had flagged a small operating loss for last year, estimating a $2 billion hit from lost sales from the damage to its once stellar reputation for quality and the recall costs.

Instead, it posted an operating profit of 147.5 billion yen, bouncing back from a loss of 461 billion yen in 2008/09.

Toyota made an operating profit of 95.3 billion yen in January-March, a third straight quarterly profit and a swing from the 682.5 billion yen loss a year earlier, the biggest in its 73 year history.

The result beat a loss estimate of 6.25 billion yen in a survey of 21 brokerages by Thomson Reuters I/B/E/S.

The automaker said the impact on sales volume from its recalls was smaller in the 2009/10 financial year than the 100,000 units it had estimated in February, while cost cutting had lowered its breakeven point to about 7 million vehicles from near 8 million a year ago. Toyota expects to sell 7.29 million vehicles globally in 2010/11, versus 7.237 million last year.

The better result was also despite the added burden of about 100 billion yen in quality-related provisions that it booked in the fourth quarter instead of in this business year.

There's no change in the fact that we are in stormy waters. But now I feel that even in the storm, we can see a ray of sunlight in the distance, President Akio Toyoda told a news conference.

Less than a year at his post, Toyoda, the media-shy grandson of the company's founder, has had to face grilling in U.S. congressional hearings over Toyota's safety record.

Toyoda, a racing car enthusiast, was criticized for his initially sluggish response when the recall crisis erupted in January but has since addressed customers, workers and dealers in all major markets, at times tearfully, in an effort to boost morale and restore consumer confidence.

Toyota has beaten the market's growth in its most important U.S. market in the past two months with the help of incentives including zero percent financing, and has said it would continue offering them at least until the end of May.

The global recovery in auto sales from the depths of the financial crisis a year ago has boosted all major automakers, with Honda, Ford Motor Co and South Korea's Hyundai Motor Co <005380.KS> all posting stronger-than-expected quarterly earnings in the past month.

But caution about the outlook has also been widespread, with Suzuki Motor Corp <7269.T> on Monday highlighting the risks to growth posed by Greece's growing debt woes as it forecast flat earnings this year.

Part of the threat comes from the yen's strength against the euro and dollar in times of uncertainty. Toyota forecast the dollar to average 90 yen and the euro 125 yen in the business year to next March.

Shares in Toyota have lost about 10 percent in the year to date, about double the drop in Tokyo's transport sector subindex <.ITEQP.T>. Before the results, Toyota ended down 0.7 percent at 3,495 yen, while the transport sector lost 1.3 percent.

($1=93.32 Yen)

(Additional reporting by Elaine Lies; Editing by Lincoln Feast and Ian Geoghegan)

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