TOKYO - Honda Motor surprised investors with a near tripling of its annual profit forecasts, bumping it further ahead of Japanese rivals thanks to a dominant motorcycle business and line-up heavy in small cars.

But Honda, the world's seventh-biggest carmaker, attributed the bulk of the revision to state-backed measures to stimulate sales and warned a real recovery in demand was still a ways off.

While rivals Toyota Motor Corp and Nissan Motor Co are also expected to report improved second-quarter earnings next week, Honda is seen making the most profit by far for the full year, helped by its more flexible operations and fewer exports from Japan, where the strong yen has raised costs.

Analysts said Honda's outlook may yet be too conservative after it lowered its average dollar assumption to 85 yen from 90 yen for the second half of its financial year to March 2010.

A weaker dollar, which traded around 92 yen on Tuesday, crimps Honda's earnings in yen terms.

The stock will probably surge tomorrow, said Fumiyuki Nakanishi, manager at SMBC Friend Securities in Tokyo.

The strong results and conservative views on the second half and currency rate assumptions will be positive for Honda's stock price.

However, some analysts cautioned Honda faced heated competition from South Korean rivals, particularly Hyundai Motor Co (005380.KS) which last week beat forecasts with a record quarterly net profit.

At this moment, Honda's real rival is Hyundai, said Kazutaka Oshima, CEO of Rakuten Investment Management in Tokyo.

The South Korean automaker seems to be doing better, helped by a cheaper won. Japanese makers are also losing their quality advantage that could have made up for the price gap with their South Korean rivals.


Honda, the maker of Civic cars, raised its operating profit outlook to 190 billion yen ($2.07 billion) from 70 billion yen for the full year to March 31, 2010. It also nearly tripled its net forecast to 155 billion yen.

That topped consensus forecasts from 21 brokerages for an operating profit of 139 billion yen and a net profit of 113 billion yen.

Honda also raised its global car sales forecast for the full year by 3.2 percent to 3.4 million units and its motorcycle sales projection by 6.9 percent, to 9.565 million units.

Demand has especially been brisk for Honda in Japan, powered by generous tax reductions and incentives on hybrids such as its new Insight model, while China has also been a rare bright spot.