Japan's No.1 automaker now expects operating profit - earnings from its core operations - for the year to end-March of 270 billion yen ($3.5 billion), a drop of 42 percent from last year, and lagging a consensus forecast of 331 billion yen from 23 analysts surveyed by Thomson Reuters I/B/E/S.

Toshiyuki Kanayama, senior market analyst at Monex Securities, said the revised profit guidance was a bit of a disappointment. "But the market is looking at the next financial year. The key for Toyota shares will be whether profit (next year) will rise to around 800 billion yen."

Toyota, which has a market value of $135 billion -- more than rivals Honda Motor Co Ltd, Nissan Motor Co Ltd and Suzuki Motor Corp combined -- raised its annual forecast for net profit, which includes earnings made in China, by 11 percent to 200 billion yen.

October-December operating profit jumped 51 percent to 149.7 billion yen ($1.95 billion) from a year earlier, well ahead of the average estimate of a small decline to 93.9 billion yen.

Those results defied the impact of a stronger yen and the disruption to production and supply chains from widespread flooding in Thailand late last year that battered Toyota just as it was recovering from the March earthquake in Japan.

Toyota reckons the Thai floods will cost it 240,000 vehicles in lost production worldwide, allowing General Motors Co and Volkswagen AG to overtake it in 2011 vehicle sales.

Quarterly net profit slid 13.5 percent to 80.9 billion yen.

With the two natural disasters mostly behind it, Toyota expects its sales to jump by more than a fifth this year to a record 9.58 million vehicles, including subsidiaries Daihatsu Motor Co and Hino Motors Ltd. All its car factories, bar Thailand, are back at full speed.

"It's premature to talk about any (sales) trends by looking only at our performance from last year when we had all those natural disasters," Toyota President Akio Toyoda told reporters last week. "I would want Toyota to be measured on how we do this year, provided it's a peaceful one."

Senior Managing Officer Takahiko Ijichi said Toyota aimed to increase sales in China, the world's biggest market, by around 14 percent to more than 1 million vehicles this year. He expects competition, particularly in North America, to be tough.

"The Big Three have improved their financial standing quite a bit, partly thanks to support from the government. Their cars are also getting better, and in that sense the competitive landscape has gotten a lot tougher," Ijichi said, referring to Ford Motor Co, General Motors and Chrysler Group LLC.

"Korean brands are also pushing hard, so, for Toyota and Japanese brands, it's a very tough race."

Still, Ijichi said Toyota's 19 new or refreshed models due in the United States this year should help it recover lost ground after a difficult 2011.

YEN WEIGHS

With the dollar trading at 76-77 yen, Toyota's Achilles' heel remains its heavy exposure to Japan.

Toyota last year built 2.76 million cars at home, accounting for one-third of Japan's total vehicle production. It exported 57 percent of that, much of it at a loss. A plan to return its Japan-based parent operations to break-even assumes a dollar rate of 85 yen.

"Compared with Honda and Nissan, the pace of Toyota's profit recovery is very slow," said Koji Endo, analyst at Advanced Research Japan. "The issue of high fundamental costs appears not to have improved at all."

Last week, Honda reported weak profits hit hard by the twin natural disasters, but flagged a big leap next year. Nissan, Japan's No.2 automaker, reports on Wednesday.

Toyota is scrambling to make its domestic factories more efficient to keep its promise of building at least 3 million vehicles a year at home.

Ijichi said the company was also looking to import more components for Japan-made cars, setting up a special task force to speed up those efforts. Toyota now sources "a few percent" of its parts from abroad, he said.

For now, Toyota is counting on Japan's re-instatement of cash-for-clunkers subsidies and the extension of tax incentives to ease some of the pain at home. The incentives particularly benefit hybrids and other cars that use new technologies. Its newest Aqua hybrid received orders equivalent to 10 times the sales target in its first month.

Toyota shares have risen 28 percent since the market's trough in late-November, and Monday touched a 6-month high. Tokyo's main Topix index is up 10 percent over the same period, while Nissan has gained 16 percent and Honda 29 percent.

Ahead of the results Tuesday, Toyota shares closed flat at 2,986 yen, and the Topix gained 0.4 percent.

($1 = 76.5850 Japanese yen)

(Additional reporting by Hideyuki Sano, Yoko Kubota and James Topham; Editing by Matt Driskill and Ian Geoghegan)

• A Permanent Economic Emergency