Toyota, the world’s biggest carmaker, has unexpectedly clawed its way back to profit after a summer of scrappage incentive schemes in the US and Europe and a round of ferocious cost cutting. But the company was swift to quash any premature optimism over the state of the American car market, where it said conditions were still “very severe” and the company is battling to limit the damage of a 3 million-vehicle recall.

The company is also mulling over plans to significantly bolster its research and development presence in China – a market that it has failed to exploit with anything like the efficiency it has penetrated Europe and the US. The local R&D base would supposedly allow the Japanese company to better tailor its vehicles to the local market.

Toyota’s return to profit followed the announcement on Wednesday that it would leave Formula One racing before the 2010 season begins – a move that may save the company about $300 million (£181 million) a year, but which will cause an estimated $200 million of international brand exposure to vanish overnight. The company’s tearful public withdrawal from the sport, said analysts, portends further aggressive cost-cutting.

The glimpse of Y21.8 billion (£146 million) of black ink at the end of the July to August quarter was a welcome surprise for investors, but is unlikely to prevent the carmaker from logging its first full year of losses since Toyota switched from making sewing looms to cars 60 years ago.

Japanese exporters are still suffering the effects of a strong yen and a new government that does not share its predecessor’s business-friendly attitude to policymaking. Toyota, in common with other carmakers around the world, also faces the end of many government incentive schemes that generated the summer boom in car sales. Japan particularly, with its debt to GDP ratio now close to 200 per cent, is in no position to extend its own version of the stimulus measure.

With its first profitable quarter after a run of three consecutive loss-makers, Toyota yesterday adjusted its forecasts and expects to finish fiscal 2009 Y200 billion in the red – less than half as dire as the Y450 billion loss it was predicting earlier.

Toyota’s return to form is likely to be a big source of relief for investors, but completes a trio of improvements by the other big Japanese carmakers, Honda and Nissan. With the US scene still intensely difficult, said analysts, Toyota’s future prospects hinge on its ability to perform more strongly in China, which is expected to overtake America as the world’s biggest car market by the end of this year. As of 2008, Toyota only held about 6 per cent of the Chinese market.

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