Toyota Motor Corp. says it now expects to sell 7.03 million vehicles in the 2010 fiscal year ending March 31, up 430,000 units from an earlier forecast of 6.6 million.

Toyota credits the increase to government stimulus programs, as well as demand for its environmentally friendly models, specifically hybrids such as the Prius.

The adjustment in vehicle sales for the fiscal year comes after Toyota announces it made a ¥58 billion ($641 million) consolidated operating profit in its second quarter, from July through September.

The auto maker expects to book a ¥350 billion ($3.9 billion) loss in operating income in the current fiscal year, better than the ¥750 billion ($8.3 billion) loss it predicted earlier. The company credits an expected increase in vehicle sales, as well as efforts to reduce fixed costs from ¥900 billion ($9.9 billion) to ¥1.3 trillion ($13.8 billion).

However, Toyota urges caution going forward.

Takuo Sasaki, a TMC managing officer, tells analysts in a conference call there is no telling what demand will look like in the fiscal second half as many government programs to stimulate car sales are ending, including one in Toyota’s home market of Japan.

An expected ¥200 billion ($2 billion) loss in net income for fiscal 2010 – a ¥250 billion ($2.8 billion) improvement from its earlier forecast – largely can be blamed on the appreciating yen, Sasaki says via an interpreter.

“While vehicle-sales volume is to increase in our outlook from the (fiscal) first half to the second half, we have to think about the exchange rate of the Japanese yen to the U.S. dollar,” he says.

Toyota assumed an exchange rate of ¥96:$1 in its fiscal first-half, but in the second half it expects a rate of ¥90:$1, “about a ¥100 billion” negative impact, Sasaki says.

Toyota Executive Vice President Yukitoshi Funo tells Reuters, “There is not much we do to battle the stronger yen apart from continuing with our cost reductions.”

One of those reductions was announced yesterday, with Toyota saying it would exit Formula 1 racing, reportedly resulting in ¥50 billion ($552 million) in savings for the auto maker.

Although the fiscal second-quarter result represents a 65.8% decline from year-ago’s ¥169.5 billion ($1.9 billion), it beats the ¥194.9 ($2.2 billion) loss Toyota saw in the first quarter and also bests many analysts’ estimates.

Toyota credits a ¥30.5 billion ($337 million) North American operating income, partially the result of an increase in used-car prices in the U.S., for its positive operating profit.