(Adds company and analyst comments, Japan sales forecast cut)
By Chang-Ran Kim
TOKYO, July 29 (Reuters) - Honda Motor Co , Japan's second-biggest auto maker, posted a 12 percent fall in quarterly operating profit on Tuesday, hit by a sales slump at home and a weak dollar, but it raised its full-year forecasts.
Factoring in smaller-than-expected currency losses, Honda forecast that its operating profit for the year to March 31 would fall 6.6 percent from last year to 644 billion yen ($5.4 billion), better than the 620 billion yen it forecast three months ago.
"Q1 was below what we were expecting but we see the domestic business as having bottomed out in the first quarter," said Kurt Sanger, auto analyst at ING Securities.
"The slight upward revision for the full year is due to a minor change in their forex assumption and an improvement in their European operations."
Honda, the first big Japanese car maker to report results for the first quarter to end-June, racked up record earnings last year like its rivals, but its industry-beating run in the profitable U.S. market was countered by a domestic sales slump.
Its profit margins lag those at rivals Toyota Motor Corp and Nissan Motor Co , but its earnings are healthy compared with U.S. counterparts, which are caught in a fierce price war on their home turf.
Honda, which is also the world's biggest motorcycle maker, has been dragged down this year by a stronger yen against the dollar, although an even sharper fall in the yen against the euro has helped European sales.
Operating profit for the three months to June was 150.18 billion yen ($1.3 billion) compared with the 170.82 billion yen posted a year earlier and an average 157 billion yen forecast by six analysts.
Net earnings shrank 5.4 percent to 101.82 billion yen, or 106.02 yen per share, as revenue grew 3.7 percent to 2.01 trillion yen.
Honda still made a solid showing in the U.S. market, which accounts for 80 to 90 percent of its total operating profit.
INCENTIVES
Thanks to the popularity of the new Pilot sport utility and the remodelled Accord sedan, a perennial hot seller known for its high resale value, its U.S. sales are up 13 percent this year against a slight fall in overall vehicle demand, helping its market share rise by one percentage point to 8.1 percent.
That feat is especially noteworthy because its spending on incentives such as rebates and interest-free loans fell to just under $300 per vehicle in the first quarter compared to an average $460-470 in the same period a year ago .
"We've managed to keep incentives exceptionally low," Executive Vice President Koichi Amemiya told a news conference.
Detroit's 'Big Three' -- General Motors , Ford Motor and DaimlerChrysler's Chrysler arm -- have jacked up their incentives to above $3,000 per vehicle and their profits have suffered accordingly.
But Honda is struggling more than any of its rivals at home. Sales have plunged 35 percent so far this year due to an ageing model line-up and the company has cut its domestic target to 815,000 vehicles from 855,000 for the business year.
Citing a tough market at home, a slower rate of growth in the United States and unfavourable exchange rates, Honda has taken a cautious view for the full year to next March.
Honda changed its assumed dollar and euro rates to 117 yen and 128 yen from a conservative 116 yen and 125 yen set in April. As a result, it now expects currencies to lop off 85.8 billion yen from full-year profits instead of 111.5 billion yen.
"Domestic sales have slumped more than we first envisaged, but we have offset this with better sales in North America, Europe and Asia and we also have the contribution from currency," said Chief Financial Officer Satoshi Aoki.
During the April-June quarter, Honda shares rose 15 percent, outperforming the broad TOPIX index's 13 percent rise but lagging the average 19 percent rise of Japan's top five auto makers.
Before the announcement on Tuesday, its shares closed down 1.67 percent at 4,710 yen, slightly underperforming the 1.36 percent fall in Tokyo's transport equipment subindex . ($1=119.46 yen)