Honda Motor Co <7267.T> raised its cautious annual outlook beyond market expectations as a recovery in the key U.S. market helps counter the strong yen and sliding Japanese sales, which dragged its third-quarter profits down 29 percent.

Japan's top automakers are all expected to report a sharp decline in October-December profits as the end of subsidies for eco-friendly cars has hammered domestic sales since October.

A 6 yen fall in the dollar and higher raw materials costs are also seen erasing the positive effect of global sales gains.

But Japanese car makers have also taken steps to reduce fixed costs and boost manufacturing efficiencies in moves expected to keep profit margins relatively healthy, boding well for future earnings as the key U.S. market recovers.

Honda, which fell behind Nissan Motor Co <7201.T> to become Japan's third-biggest automaker last year, raised its operating profit forecast for the year to March 31 to 620 billion yen ($7.55 billion) from 500 billion yen. A survey of 20 analysts by Thomson Reuters I/B/E/S forecasts profit of 594 billion yen.

It lifted its net profit forecast to 530 billion yen from 500 billion yen.

The maker of the popular Accord and Civic models reported a 29 percent fall in October-December operating profit to 125.65 billion yen, from 177 billion yen a year earlier and beating the average 110 billion yen estimated by seven analysts surveyed by Reuters.

Nine-month profits easily exceeded Honda's previous full-year profit forecast.


Robust sales growth in emerging markets has helped global automakers weather a fall in mature markets such as Europe, and Honda has especially benefited from its lucrative motorcycle business in lower-income countries. Its global motorcycle sales jumped 19 percent to a record 17.95 million units in 2010.

But a convincing recovery in the U.S. car market -- Honda's biggest -- is the main factor that has stoked optimism among investors, sending its shares up about 20 percent over the past three months, outperforming Toyota Motor <7203.T> and Nissan.

While Hyundai Motor <005380.KS> stole rivals' thunder in the United States last year with the biggest growth among major brands, many expect Honda to boost its share this year with the upcoming revamping of the high-volume Civic and CR-V models.

Honda's third-quarter net profit, which includes earnings made in China, was 81.12 billion yen, down 40 percent from a year earlier. Revenues fell 5.8 percent to 2.11 trillion yen.

Hyundai last week reported a record quarterly profit, although analysts say competition will heat up for South Korea's top automaker as other popular models such as Toyota's Camry undergo a remodelling.

Before the results were announced on Monday, Honda's shares ended down 1.4 percent at 3,475 yen.

Toyota will report third-quarter results on February 8 and Nissan on February 9.

(Editing by Anshuman Daga and Michael Watson)