Toyota subsidiary Daihatsu on Friday said it would pull out of the European market within two years because of the strong yen cutting profits. The brand has already been pulled from showrooms by its UK importer, also citing the strong yen, and its website now shows only service dealers.

The strength of the currency has made exporting vehicles from Japan to Europe nearly impossible, Daihatsu told AFP, becoming the first casualty among Japanese automakers dealing with the unit's appreciation against the dollar and euro.

Daihatsu said it will discontinue auto sales in Europe at the end of January 2013 but would continue to supply parts and after sales services.

"Daihatsu came to the decision because it could not make a business out of exporting completed units produced in Japan", a company statement said.

The Osaka-based car maker said it sold 19,300 vehicles in 10 European countries in 2010, about a third of the 58,600 vehicles it sold in the region in 2007 before the onset of the global economic crisis.

The yen has appreciated sharply against the euro since late 2008 and especially since mid-2010. The euro currently fetches around JPY110, near its lowest level in nine years, against around JPY135 in mid-2010 and JPY117 in 2008.

Daihatsu added that deteriorating profitability was compounded by the increasing cost of developing vehicles that meet tighter CO2 emission regulations in Europe.

Exporting from Japan was not a viable business "when the costs to meet European regulations on CO2 emissions are growing and the profitability is deteriorating due to a stronger yen against euro," it said.

In Japan, the automaker has forecast 8% growth in net profit to JPY44bn (US$533m).

But recent surging quarterly profits for Japan's top companies belie the threat posed by a strong yen, as the unit's rise prompts firms to consider shifting production out of the country to stay competitive, say analysts.

For many Japanese firms, the yen's surge against the dollar and the euro has mitigated a post-financial crisis revival in demand and undermined the benefits of earlier cost cuts and restructuring.

More companies are considering moving production overseas to stay competitive against rivals benefiting from weaker currencies in their home countries.

Carmakers Honda and Mazda reported strong profits in the second quarter but said the strong yen clouded their profit outlook. Honda downgraded its sales expectations for the year.

Toyota last year started producing its Prius hybrid model in Thailand in a move to expand production overseas as the strong yen continues to bite into profits.

Rival Nissan has also said it is looking to reduce exports from Japan while increasing imports, aiming to shift more production abroad as a short-term measure to cope with the yen.

Daihatsu, a specialist in city cars, small SUVs and light trucks, has had a chequered history in some markets. It entered the US market in the late 1980s but pulled out again after a few years and its operations have been consolidated with parent Toyota's in some Asia Pacific markets in the last decade or so.

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