Toyota, the industrial bellwether of the Japanese economy, today stunned markets by issuing a profits warning, forecasting its first full-year slump in operating profits in nearly a decade.

The Japanese giant gave warning that profits will fall by 29.5 per cent for the year, after admitting that income between January and March declined 28 per cent to ¥316 billion (£1.5 billion) — the first slide in quarterly profits for three years and below analysts expectations. Japan’s Nikkei 225 index closed 159.2 points, or 1.1 per cent, at 13,943.26.

The company blamed the profits slide on a number of factors including the soaring cost of crude oil, which neared a record of $124 a barrel overnight, aggressive price rises by raw material suppliers and a drawn-out slide in the US dollar.

Katsuaki Watanabe, the president of Toyota, attempted to assure investors that the group’s 10 per cent profit margin target was still in place.

However, the environment has deteriorated further than expected.

Analysts said that globally high petrol prices are inherently bad for new car sales, particularly in the US. In terms of sales, Toyota does stand to benefit from a general switch from large, high fuel consumption vehicles to smaller more efficient models. But smaller cars deliver lower margins. Strong emerging market sales were, for the same reason, unable to offset the overall drop in profitability.

Despite the challenges facing the company, 2008 remains on target to be the year in which Toyota surpasses General Motors as the world’s biggest automaker — after missing out on the title by only 3,100 vehicle sales last calendar year.

Toyota’s vehicle sales have already outstripped those of GM in the first quarter of this year.

“This is a very, very conservative company from a very, very conservative part of Japan,” said Ed Merner, the president of Atlantis Investment. “Its forecasts assume that everything that could go wrong will go wrong. It is ultimately why this company is in such good financial condition.”

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