Toyota Motor Corp. said Friday it expects a ¥850 billion group operating loss and a ¥550 billion net loss for the year ending next March — its biggest losses ever and its second straight year of red ink — as the global economy shrinks and the yen muscles up against other currencies.

The auto giant said group sales for the year are expected to drop to 6.5 million units from 7.57 million a year earlier.

“We should expect the harsh business environment to continue,” Toyota President Katsuaki Watanabe told a news conference in Tokyo. “China and India are showing some improvement, but it will take time for the U.S. and European markets to go back to normal.”

For the year that ended on March 31, Toyota logged a ¥461.01 billion group operating loss and a ¥436.94 billion net loss. The results were worse than its Feb. 6 forecast of a ¥450 billion group operating loss and a ¥350 billion net loss.

Friday’s figures are the biggest ever for the automaker, which was founded in 1937, and the first since 59 years ago, when it posted a ¥76 million pretax loss for the year that ended in March 1950.

They also contrast sharply with the ¥2.27 trillion group operating profit and ¥1.72 trillion net profit Toyota posted in March 2008, underlining how fast global demand has dried up.

Global demand, which has been dragged down by the U.S. financial and economic crisis, has rapidly tanked and driven debt-ridden U.S. rivals General Motors Corp. and Chrysler LLC to the edge of bankruptcy. Meanwhile, the yen’s rise against the dollar and euro is eroding Toyota’s overseas profits. Higher prices for raw materials also weighed on its earnings.

To improve the bottom line, Watanabe said Toyota will slash manufacturing costs and fixed costs, mainly capital investment, by ¥800 billion for the year to next March.

Toyota meanwhile plans to reinforce development of small and less-polluting vehicles, which it views as the key to its future.

“I believe the market will recover for sure in the future. The main products will be eco-friendly and compact cars,” Watanabe said, noting emerging markets will play a bigger role in the global market.

Watanabe said the auto giant will launch four new hybrid models in Japan, including versions of the Prius and Lexus, and three new hybrids overseas this year. It will unveil the so-called third-generation Prius hybrid on May 18 and the Lexus HS250h in July.

Analysts said Toyota’s earnings were hit hard because it expanded its lineup to include large pickup trucks and sport utility vehicles, which have been shunned amid soaring gasoline prices and rapidly declining demand.

Another reason is that Toyota was overextending itself to expand global supply to meet higher demand just before the financial crisis erupted and spooked consumers.

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