Japanese car makers, led by Toyota Motor, have stormed markets from the United States to Europe and beyond, but are fighting a losing battle in a shrinking and disinterested home market.

While Detroit's Big Three -- General Motors Corp, Ford Motor Co and Chrysler LLC -- struggle to hold market share against popular Asian rivals and luxury European brands, overall U.S. demand remains healthier than in Japan.

The market for new cars and trucks in the world's second-largest economy has contracted 7.6 percent so far this year to 4.13 million vehicles. Sales are heading for a third straight year of falls and are a far cry from an annual peak of 7.78 million in 1990.

I'm not very optimistic about the domestic market, Honda Motor Chief Executive Takeo Fukui said last month.

Car makers have blamed everything from a shrinking population to lengthier ownership, a lack of interest among young people and competition against other big-ticket consumer goods such as flat-screen TVs.

There are structural factors that make the domestic market very difficult, said Osamu Masuko, Fukui's counterpart at Mitsubishi Motors, citing in particular a population shift to big cities.

Attorney Tsuyoshi Satake epitomizes the issue.

For six years, his Toyota Caldina wagon got him around Japan's far-flung regions from Hokkaido to Okinawa. Until, that is, he took up residence in Tokyo three years ago.

There's no parking here, and public transport works like a dream, 36-year-old Satake said. I do miss driving, but there's really no reason to own a car in the city.


Virtually no brand has been spared the downfall, including Toyota, the world's largest and most profitable auto maker.

Less than a fortnight after standing firm on the company's domestic sales target, Toyota President Katsuaki Watanabe bit the bullet this week, saying local sales this year could be 4 percent below an original goal of 1.72 million vehicles.

Where did it all go wrong?

External headwinds such as soaring oil prices don't help, but some say carmakers are simply not meeting local customers' needs as they develop globally compatible models to save costs.

I want automakers to build cars that sell, Nanao Oguri, head of the Japan Automobile Dealers Association, said earlier this year. One Nissan dealer interpreted his comment as: build cars that cater exclusively to Japanese needs.

The success of 660cc mini-vehicles could be a case in point.

The segment, unique to Japan, hit record sales of 2 million in 2006, and now makes up 36 percent of the total market.

Long a favorite among rural folk as a second or third set of wheels, they have recently evolved with clever packaging and roomier interiors to win over more city dwellers.

That has helped Suzuki Motor Corp and Daihatsu Motor Co, which together account for the bulk of sales. But margins are slim on mini-vehicles, which typically cost less than 1 million yen ($8,500).

Yet even as climbing fuel prices steer domestic consumers towards microcars, many models from the Honda Accord to the Subaru Impreza kept getting bigger with each facelift as carmakers seek to bring them in line with requirements overseas.

Still, Japanese automakers haven't given up entirely.

Toyota has about 25 models developed exclusively for Japan -- about half its line-up here -- including the revamped Noah/Voxy minivan, which has proven a hit.

Meanwhile, Honda's Crossroad compact 7-seater has fallen consistently short of a 3,000-unit monthly target, indicating that developing a Japan-only car is not an easy fix.

Carmakers are also getting mixed signals from consumers.

Models developed mainly for Europe such as Nissan's Qashqai crossover have outpaced expectations at home just as Toyota's Avensis sedan did a few years back, confounding the dilemma for developers.


For now, Japanese carmakers aren't worried about a pile-up of stock or slower production, saved by brisk demand overseas.

Most are expected to report higher profits this year thanks to growth in global sales. Besides, the domestic market has never offered much in margins, and Toyota, Honda and Nissan all sell more cars in the United States than in Japan.

But longer term, the indifference towards cars among Japan's youth is going to catch up with them, one analyst said.

Sure, Japanese cars are popular abroad, Mizuho Investors Securities analyst Atsushi Kawai said. But if young people here can't get excited about cars, who's going to want to build them in the future?

That means Japanese carmakers need to do more to target the young, despite the temptation in recent years to cater to the country's ageing population.

We haven't taken a poll or anything, but I get the feeling there are fewer car lovers among young engineering recruits, said Nissan Executive Vice President Mitsuhiko Yamashita.

Nissan may be putting its money where its mouth is.

The Round Box (Rd-Bx) all-in-one sports car and RV concept model that will premiere at this month's Tokyo Motor Show is aimed at city-dwelling college students who may prefer hanging out at a sports bar to taking a car for a spin.

They say young people are losing interest in cars, the car's chief designer, Kaoru Sato, said. We've tried to offer something totally new to win them back.

(Additional reporting by Noriyuki Hirata)