Honda Motor first fiscal quarter net income plunged 96% to JPY7.5bn (US$79m), after revenue fell 30% to JPY2.002 trillion ($20.85bn) as vehicle sales dropped and currency effects hit, but has raised its full-year forecast.

Operating income for the first three months of the 2009/10 year was off 88% to JPY25.1bn ($262m), not helped by lower production volumes increasing fixed per-unit costs.

Conditions remain extremely severe in the auto market,” Honda executive vice president Koichi Kondo told a news conference in Tokyo on Wednesday.

Sales were especially short of expectations in the US market, Kondo said, saying that the automaker planned to spend about $300m more than anticipated in profit-eroding incentives this year to sell its mainstream, locally produced Accord and Civic models.

“The market expected a loss so this is really a surprise, especially given that Honda seems to be having a tough situation in the United States and a lot of inventory,” Chibagin Asset Management fund manager Hiroaki Osakabe told Reuters.

Honda’s vehicle sales fell 20% to 766,000 units worldwide. Japan sales were flat at 128,000 but volume outside the home market dipped 23.5% to 638,000 due mainly to a reduction in North America.

The automobile operating loss fell JPY171.7bn year on year to JPY21.3bn.

Financial services revenue rose 6.9% to JPY155.9bn ($1,624m) as lease sales increased. Operating income soared 62.8% to JPY46.8bn ($488m) due to a decreased allowance for losses on lease residual values and a decrease in funding costs.

Honda revised upward its earnings forecast for the whole of fiscal 2009/10 and now expects a group net profit of JPY55bn (down 60% year on year) versus its earlier projected JPY40bn.