Toyota Motor Corp reported its first quarterly loss in two years on Tuesday as Japan's biggest earthquake hammered production and a strong yen hit export profits, and the company raised its profit forecast on a speedy recovery.

The supply constraints from the March 11 earthquake have eased faster than initially feared and Toyota, the world's biggest automaker, said unrestricted production would return in September, about two months ahead of a previous forecast.

But the dollar's drop is set to further eat into profits as Toyota exports more than half of its vehicles produced in Japan, and an executive warned that Toyota's domestic operations would struggle to claw out of the red at current exchange rates.

The first impression is not bad. A company that can generate such a level of profit at a dollar/yen rate of 80 yen doesn't look bad, said Takashi Aoki, vice president of the equity investment division at Mizuho Asset Management.

But it's hard to say if this is good news for its stock performance because factors outside the company's efforts, such as the yen exchange rate and the U.S. sovereign debt issue, will have a bigger impact. I'm personally closely looking at the yen level.

The world's biggest automaker made an operating loss of 108 billion yen ($1.4 billion) in the April-June quarter, compared to a 211.7 billion yen profit a year earlier. The result was better than the average loss estimate of 190 billion yen in a survey of six analysts by Thomson Reuters I/B/E/S.

The maker of the Prius and Camry sedans posted a net profit of 1.2 billion yen compared to a 190.5 billion yen net profit the previous year. Revenue fell 29.4 percent to 3.44 trillion yen.

For the full year to March 2012, Toyota raised its forecast for operating profit, which excludes earnings from China, to 450 billion yen. A poll of 20 analysts produced a forecast of 529.7 billion yen.

Even before the March disaster and the yen's recent surge, Toyota had been trying to slash costs by roughly 30 percent to take on South Korea's Hyundai Motor Co, which has boosted its market share globally in recent years by offering quality products at competitive prices.

With the dollar around 77.7 yen, Toyota executives have warned that keeping as much production capacity as it has in Japan was illogical, although they have stopped short of flagging a politically sensitive shift overseas.

YEN WOES

Toyota said it would try to raise product prices as much as possible to counter the yen, but admitted it would be difficult because of the inroads the competition is making into its market share.

Toyota will try to fight the yen's strength by buying more parts overseas, a move that Senior Managing Officer Takahiko Ijichi warned could indirectly shift Japanese manufacturing overseas through the component supply chain.

I think that in some ways, our history has been defined by a constant battle against currency swings and it's made us stronger, Ijichi told a news conference. But this (dollar) level below 80 yen, of 76 yen, is way beyond the limit.

Toyota said it now assumes a dollar rate of 80 yen instead of 82 yen this financial year and the euro at 116 yen instead of 115 yen. On Tuesday, the dollar was trading around 77.35 yen while the euro was around 110.25 yen.

Ijichi noted that the dollar had weakened by 16-17 yen from April last year, meaning that for a $20,000 car sold in the United States, Toyota's gross profit would be $3,000 less.

Toyota has said it will continue taking steps to lower the cost structure of its domestic operations to keep at least 3 million vehicles of annual production in Japan in the interest of protecting Japanese jobs and manufacturing. Last month, it announced plans to streamline vehicle development and production through a reorganization of its car assembly units.

Shares in Toyota are down 1.9 percent so far this calendar year, underperforming a 3.8 percent drop in the benchmark Nikkei average. Before the results were announced on Tuesday, Toyota shares closed down 0.3 percent at 3,160 yen in Tokyo. ($1 = 76.615 Japanese yen)

(Reporting by Chang-Ran Kim; Editing by Matt Driskill and Michael Watson)

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