TOKYO: Toyota Motor's surprise quarterly profit and halving of its annual loss forecast were not enough to convince investors that the world's No. 1 carmaker had escaped the worst, as government subsidies peter out and a strong yen takes its toll.

Toyota, the world's biggest carmaker by sales, wrapped up an earnings season dominated by rosier projections from Japanese automakers as they squeeze out savings and boost manufacturing efficiencies to offset the damaging rise in the yen.

The industry has been helped by government-backed incentives from Germany to China and Japan, aimed at igniting demand through the worst economic crisis in generations.

But with the outlook for demand uncertain as such stimulus programmes begin to run out, Toyota is looking to eliminate more spending, announcing its exit from Formula One racing on Wednesday to put its annual budget of US$300 million (S$420 million) to better use.

'The biggest challenge for Toyota is cutting overheads, which had increased in the past 20 years when the company enjoyed growth,' said Mr Koji Endo, a senior analyst at Advanced Research Japan.

Toyota, until two years ago the world's most profitable automaker, had been the only top Japanese carmaker expected to post a loss in the latest quarter, weighed down by severe overcapacity after years of building new factories.

It now expects an operating loss of 350 billion yen (S$5.4 billion) for the financial year to March 31, still above an average projection of a 293 billion yen loss in a poll of analysts by Thomson Reuters. It narrowed its net loss forecast to 200 billion yen from 450 billion yen.

Toyota also lifted its annual group-based global vehicle sales forecast by 6.5 per cent to 7.03 million units.

For the July-September quarter, it reported an operating profit of 58 billion yen, down 66 per cent from a year earlier but beating an average estimate of a loss of 63 billion yen from five analysts.

Its net profit fell 84 per cent to 21.84 billion yen, while revenue dropped 24 per cent to 4.54 trillion yen.

But the yen's strength remains Toyota's Achilles heel as it exports more than half of its vehicles built in Japan.

A top executive acknowledged that its US operations remained difficult and it must cut fixed costs more to battle a strong yen, which is making exports unprofitable. While red-hot demand in China has been a boon for all brands, Toyota's sales growth there has lagged the overall market's due to a dearth of smaller models that qualify for Beijing's tax incentives introduced this year.