Toyota Motor Corp <7203.T> is aiming to significantly lower the break-even point for its Japanese operations through a slew of improved manufacturing processes, a top executive said on Friday.

Toyota President Akio Toyoda has said he wants to maintain domestic production of at least 3 million vehicles a year in Japan to protect jobs and the tradition of manufacturing, or monozukuri, at home despite headwinds from a stronger yen.

Toyota is more exposed to a firm yen than rivals Honda Motor Co <7267.T> and Nissan Motor Co <7201.T> since it produces a bigger portion of its vehicles in Japan, and is under intense pressure to lower costs or take the politically difficult step of shifting more of its production overseas.

Nissan has especially been aggressive in pursuing ways to shield itself against a strong yen by importing more parts, as well as some cars, from overseas.

We're trying to be able to operate at 85 yen (to the dollar) and 70 percent capacity utilization, Atsushi Niimi, executive vice president in charge of manufacturing, told reporters.

As the global financial crisis hammered sales and left much of its production capacity unused, Toyota embarked on efforts to make its domestic factory lines more flexible and introduce other changes to be able to break even at capacity utilization of 70 percent, equivalent to daily production of 12,000 units.

But that had assumed a dollar rate of 90 yen, far more favorable than the current 83 yen level.

Niimi said improvements in processes could reduce Toyota's capital spending by about 40 percent, limiting annual expenditure to about 700 billion yen ($8.4 billion) for the next five years or so. That is about half what it used to spend at its peak.

One measure Toyota is taking is to make its engine assembly process more compact.

We used to believe that the most efficient scale for an engine assembly line was about 18,000 units a month, Niimi said. But now we think half of that is better.

He said that because emissions and fuel economy regulations were evolving all the time, engine production would fall to half in two to three years, hurting the pace of depreciation.

By changing the layout of the engine production process and making other changes, Niimi said Toyota's engine production could be 20 percent more cost-competitive than Volkswagen AG , which he said was probably the leader now.

Depreciation-wise, Volkswagen's engine (production) cost is probably about 30 percent cheaper than ours, he said. But we think we can win by 20 percent with our new processes.

Last week, Toyota forecast its sales in Japan to fall 17 percent to a 37-year-low of 1.3 million units in 2011, worse than a 9.9 percent drop predicted for the overall market by the Japan Automobile Manufacturers Association. It plans to produce 3.1 million vehicles in Japan, meaning 58 percent would be exported.

Before the global financial crisis, management had talked of sustaining minimum domestic output of 3.8 million vehicles.

(Editing by Edwina Gibbs)