It seems that Honda's recent withdrawal from Formula One racing, much to the disappointment of motor sport fans, was not without reason. The company, Japan's second-largest automaker, may report a half-year operating loss for the first time in at least in 11 years even as it slashed its full-year profit forecast by 62 per cent as the yen surged to a 13-year high against the dollar and car sales in North America and Europe plummeted.

The company expects net income of 185 billion yen ($2.08 billion) for the year ending 31 March compared with an earlier forecast of 485 billion yen, it said in Tokyo today. Operating profit may total 180 billion yen, compared with a previous estimate of 550 billion yen. The yen's 26 per cent gain against the dollar and 30 per cent rise against the euro this year have hammered Honda's profit, forcing it to slash its workforce and management pay.

Honda said that it was being forced to reduce dividends and suspend some of its plans to expand production capacity in Japan and abroad. But CEO Takeo Fukui said he did not know when Honda would see relief from the twin stumbling blocks of declining auto demand and an appreciating yen. "The situation is worsening by the day, and there is no prospect for recovery, is our understanding," Fukui told reporters.

Honda's decline has been faster and started more recently than that of other carmakers. It earned 303 billion yen in the first half to September when a spike in oil prices lifted demand for its small, fuel-efficient cars. In the three months through June it was one of few automakers to improve its bottom line.

But since the credit crisis intensified in September, it has joined other producers in registering steep sales declines, in particular in the US, its largest market. Honda's November US sales fell 32 per cent, more or less matching the industry average. It now estimates it will sell 7 per cent fewer automobiles worldwide in 2008, but motorcycle sales were expected to soar more than 10 per cent.

Honda's sharp downgrade prompted speculation that Toyota, Japan's biggest carmaker, would follow suit when Katsuaki Watanabe, its CEO, holds a similar year-end briefing next Monday. Analysts at Goldman Sachs expect Toyota to fall into the red by 300 billion yen in the second half in what would be its first loss since at least 1940, when it began publishing financial statements.

Honda has been cutting production as sales have fallen, and yesterday it announced a further reduction of 54,000 units at its Japanese plants. Other cost-reduction measures included: cutting its third-quarter dividend in half to Y11; trimming managers' year-end bonuses and cutting directors' pay by 10 per cent; and delaying plans to expand three production facilities in Japan, one in India and one in Turkey.

The company will cut global production by 314,000 vehicles for the current fiscal year, it said today. It also will cut at least 1,210 temporary jobs in Japan. Toyota will shed 3,000 temporary workers by 31 March. Nissan Motor Co. will eliminate 2,000 positions.

It also suspended plans to introduce its high-end US brand, Acura, to Japan in 2010 shelved a planned V10-engine successor to its NSX sports car. Honda said it would focus on building the smallest cars in its range and on developing ''realistic'' petrol-electric hybrids, implying a shift away from its vaunted but pricey hydrogen fuel cell project, the FCX Clarity.

The company will set up a venture with GS Yuasa Corp. to develop, make and sell lithium-ion batteries next year. The automaker plans to develop mid- and large-sized hybrid cars. It also aims to sell an entry-level model that's smaller than the Fit compact within the next three years, Fukui said.