updated 5/8/2009 9:34:29 AM ET 2009-05-08T13:34:29

Toyota Motor Corp. lost $7.7 billion (765.8 billion yen) in the January-March quarter — a bigger loss than General Motors reported — resulting in its worst fiscal year since the Japanese automaker was founded in 1937.

Toyota also warned Friday that because of the global auto slump its net loss would deepen in the year through March 2010 to $5.55 billion (550 billion yen) from $4.4 billion (436.94 billion yen) in the just-ended fiscal year.

President Katsuaki Watanabe said the devastating results were caused by “the significant deterioration in vehicle sales particularly in the U.S. and Europe,” the strong yen and the rising cost of raw materials.

The bigger-than-expected quarterly loss — down from a profit of 316.8 billion yen a year ago — was bigger than the full-year loss because it had some positive quarters earlier in the fiscal year.

Throughout much of last year, Toyota’s sales were booming, thanks to its reputation for quality and good mileage, and the popularity of its Camry sedan and Prius hybrid.

It even overtook General Motors Corp. last year to become the world’s biggest automaker by annual sales.

But Toyota’s business has been hit hard by the U.S. financial crisis and credit crunch, which sent ripple effects around the world, causing people to hold off on buying new cars. The red ink for the full year was worse than Toyota’s own forecast for a 350 billion yen net loss, and a stunning reversal from the record profit of 1.72 trillion yen it chalked up the previous fiscal year.

Sales for the fiscal year sank 21.9 percent to 20.529 trillion yen. In the year ahead, Toyota reckons it will sell about 1 million fewer vehicles, with revenues sliding 19.6 percent to 16.5 trillion yen.

Toyota’s quarterly loss even eclipsed GM’s $6 billion in red ink for the same quarter — although the Japanese manufacturer is on far stronger capital footing than GM because of its historical profits. For all of 2008, GM lost $30.9 billion.

Robert Wiseman, professor of business at Michigan State University in East Lansing, said Toyota should emerge in good shape in the long run, and can even hope to benefit from a decrease in price competition in the U.S. as rivals weaken.

“Toyota continues to have a very strong positive brand reputation among North American buyers,” he said. “I would expect all global car manufactures to report a loss this fiscal year since car sales are way down.”

Standard and Poor’s on Friday lowered its long-term credit rating on Toyota one notch to AA — its third-highest rating — and gave a “negative” outlook. But S&P also said the automaker “maintains a minimal financial risk profile, characterized by a strong capital structure with massive liquidity.”

Toyota was likely to face hard times for awhile because demand will likely remain depressed into 2010 before it could hope to again count on its strengths to boost profits once a recovery arrives, S&P said in a statement.

A turnaround is likely to take time.

To cut costs, Toyota has been slashing managerial pay and offering buyouts to thousands of American workers. It has reduced the number of temporary workers in Japan from 9,200 last year to 3,000.

The manufacturer is expecting its operating loss — reflecting its core automaking business — to worsen to 850 billion yen for the year through March 2010 from 461 billion yen this past year.

“It appears to take some more time before the financial markets in the U.S. and Europe normalize and the global economy recovers,” Watanabe said.

Toyota’s vehicle sales for the fiscal year ended March 31 fell 15.1 percent to 7.57 million vehicles from 8.91 million vehicles the previous year. It expects to sell even fewer vehicles in the fiscal year through March 2010 — 6.5 million vehicles.

Wiseman, the MSU professor, says Toyota should prepare for an eventual recovery.

“What Toyota can do as it waits for the economy to turn around is invest in the next generation of vehicles and work on improving quality control in its production facilities,” he said.

To send a message of change, Toyota has turned to its founding family roots, tapping Akio Toyoda, the founder’s grandson, who at 53 is relatively young for leading a major conservative Japanese company.

Watanabe, whom Toyoda is succeeding in June, promised Friday more cost reduction and a focus on hybrids and compact vehicles to boost profitability. Toyota will work on ecological technology such as hybrids and plug-in vehicles toward long-term recovery, Watanabe said.

The last time Toyota had the equivalent of a net loss was in 1950, when it reported results under different accounting standards than it uses now.

Its shares fell 1.5 percent to 3,980 yen in Tokyo trading. Earnings were announced after the market closed.

Toyota is unveiling the remodeled, third-generation Prius hybrid later this month. But it is expected to be embroiled in intense competition with Japanese rival Honda Motor Co., which has already come out with a cheaper hybrid, the Insight.

Yasuaki Iwamoto, auto analyst with Okasan Securities Co., said Toyota must wait for overall industry woes to settle, but also must work on cut costs and develop cheap small cars.

“It must keep working on small cars to build toward the future,” he said.

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