Business results in the year ending March 2013 will recover to levels achieved before the failure of Lehman Brothers Holdings Inc. roiled global markets, as sales climb above 4 million vehicles for the first time, Ito said in an interview this week. Lehman filed for bankruptcy in September 2008, six months after Honda earned record annual profits, according to Bloomberg.

“It will be the year of the complete rebound,” Ito said at the company’s Tokyo headquarters. “Sales in North America will lead the recovery. We’ll introduce a fully revamped Accord in the fall, and that will be a big plus to our sales.”

Ito’s comments reflect a revival in confidence by Japanese automakers as they recover from a year plagued by natural disasters at home and in Thailand. Toyota Motor Corp., Asia’s largest carmaker, said this week annual sales will be 100,000 units higher than it anticipated last month.

“Honda’s targets are definitely aggressive, but the U.S. economy seems like it’s going to recover to a better-than- expected level this year so it’s likely for them to achieve it,” said Mitsushige Akino, who oversees $600 million at Ichiyoshi Investment Management Co. in Tokyo. “They’ve remodeled their best-selling cars, and we can expect strong sales in North America to help them regain market share.”

Honda fell 1.9 percent to close at 2,689 yen in Tokyo. It’s gained 15 percent this year, the best performer among Japan’s three biggest automakers. That’s a reversal from 2011, when the stock’s 27 percent drop made it the worst performer.

Honda’s operating income, or sales minus the cost of goods sold and administrative expenses, will probably double to 586.6 billion yen ($7.6 billion) next fiscal year after shrinking 52 percent, according to the average of 24 analyst estimates compiled by Bloomberg. Earnings reached 953.1 billion yen, 851.9 billion yen and 868.9 billion yen, respectively, in the years before Lehman’s bankruptcy.

Ito, 58, is counting on the U.S. market to drive growth.

The redesigned Accord sedan, the Civic and CR-V sport- utility vehicle will help Honda increase U.S. sales 24 percent to 1.43 million units in 2012, Ito said. Sales in the market, Honda’s largest, declined 6.8 percent last year, led by a 17 percent drop in deliveries of the Accord. The Accord is Honda’s best-selling U.S. model, followed by the Civic.

Ito ruled out any major overhaul of the Civic after the current version of the sedan, which failed to receive the “recommended” status its predecessors had from Consumer Reports magazine, was the best-selling model in the compact-car segment in the last three months of the year.

Honda’s new models will give it an edge in the U.S. over South Korea’s Hyundai Motor Co., which is producing close to full-capacity, said Kota Yuzawa, a Tokyo-based analyst at Goldman Sachs Group Inc. That puts Honda in “good position” to regain lost market share, he said.

Honda may not be alone. Japan’s three biggest carmakers are poised to gain market share this year at the expense of U.S. producers led by General Motors Co. and Ford Motor Co., according to five analysts surveyed by Bloomberg.

In China, the world’s largest auto market, Honda expects its sales to rise more than 20 percent to 750,000 units in 2012 after they shrank for the first time in 2011 in a slowing market, Ito said. The company plans to introduce three gas- electric hybrid models in the country this year, he said.

“China is still strong,” Ito said. “Once motorization captures a market, it’s unstoppable.”

China’s total vehicle sales — including cars, trucks and buses — grew 2.5 percent to 18.5 million units last year, according to the China Association of Automobile Manufacturers, trailing growth in the U.S. for the first time in at least 14 years. Honda expects the market to expand to 20 million this year, or “just above” China’s economic growth, he said.

In Thailand, where the country’s worst floods in almost 70 years disrupted assembly plants and supply of components in 2011, Honda plans to resume production starting in April, Ito said. Damages stemming from Thailand forced the company to scrap this fiscal year’s profit forecast.

As part of Honda’s strategy of producing cars where they are sold, the company plans to reorganize its Japanese factories so they focus on production of minicars, a growing category that makes up about 40 percent of the nation’s auto demand, Ito said. Orders for the N Box minicar in Japan reached 27,000 units in its first month of sales, more than double Honda’s original target.

Minicars, defined as vehicles no longer than 3.4 meters (11 feet) in length, will account for 40 percent of Honda’s Japan sales, compared with 25 percent now, Ito said.

Honda joins Toyota and Nissan in reorganizing operations as the yen, which has gained against the world’s 16 most-traded currencies for two straight years, erodes the value of exports. Honda plans to boost the portion of vehicles sold in the same region they’re built to as high as 80 percent, Ito said. In 2010, Honda sold about two out of three Japan-built cars in the country.

Officials at Toyota and Nissan this month have also echoed plans to increase their portion of vehicles sold in the region where they’re assembled.

“Minicars will be key for us in Japan in the next five years,” Ito said.

The revamp, to come by the end of 2012, is rare because new models aren’t usually overhauled for at least three years. Honda executives say they’re simply trying to stay ahead in an increasingly competitive small-car market, reported msnbc.com.

The move comes as small car sales are on the rise in the U.S., and more people choose them because of worries about gas prices and car payments. Compacts also are no longer the cramped econoboxes of the 1980s and 1990s, and they have many of the same amenities as larger cars.

The new Civic was panned by critics when it started arriving at dealerships April 20. Consumer Reports magazine said it was less agile than its predecessor, and its interior quality was worse. The magazine refused to give the Civic its coveted “Recommended Buy” rating, saying that the braking distances were long and it suffered from a choppy ride. The car’s sales ranked fourth among U.S. compacts from May through November.

The previous Civic, which came out in 2005, was known for its sporty driving, high-quality interiors, lack of noise and excellent braking, says David Champion, senior director of auto testing for Consumer Reports.

“The new one seems to have fallen apart in those areas,” says Champion, who thinks that Honda cut costs with the 2012 version.

Honda also recalled more than 1,000 of the 2012 Civics because a fuel line could leak due to a manufacturing error.

Honda has told dealers a reworked Civic will arrive before the end of next year. The car starts around $16,000, and a base model with automatic transmission gets 32 miles per gallon in combined city and highway driving. Its price and fuel mileage are about the same as its competitors.

American Honda President Tetsuo Iwamura said Tuesday that the company will improve the Civic’s drivability, but he stopped short of saying exactly what the company will do to the rest of the car.

“It’s about how do we get two or three laps ahead of the competition,” says American Honda Executive Vice President John Mendel.

In the past two years, the usual compact-car race between the Honda Civic and Toyota Corolla became a free-for-all that included high-quality entries from Chevrolet, Ford and Hyundai.

The competition will be good for buyers because companies will offer better small cars and could discount them as the competition heats up, Mendel said. He said Honda would continue to show restraint on discounts, selling its products based on their value rather than price.

The battle between the Civic and Corolla for the rank of top-selling compact in the U.S. was also upset by the March 2011 earthquake and tsunami in Japan. The disasters disrupted production, and output was again hampered by flooding in Thailand in the summer.

Honda production only recently returned to normal, and Mendel doesn’t expect dealers to be fully restocked until March.

At the same time, the competition has rolled out new models like the well-received Chevrolet Cruze, Hyundai Elantra and Ford Focus.

From May through November, the only full months that the new Civic was in showrooms, the car’s sales were nearly 109,000. The Cruze led the way at almost 140,000, followed by the Corolla at 118,000, and the Elantra at 110,000.

But last month, with supplies moving toward normal after the earthquake and floods, the Civic led all compacts in sales, according to Autodata Corp.

Despite the criticisms, the Civic still has a strong following of loyal customers, says Jeff Dyke, executive vice president of operations for Charlotte, N.C.-based Sonic Automotive Inc., a dealership chain that includes Honda dealers.

“I can’t keep one on my lot,” he says.

Honda’s loss of some North American output in October and November due to parts shortages caused by floods in Thailand led to it being the only large automaker to post a U.S. sales decline last month as total sales jumped 14 percent. That came after six months of declines resulting from reduced auto inventory triggered by Japan’s March earthquake and tsunami, according to Bloomberg.

“I’m going to the shrine to pray to avoid any more such disasters from Mother Nature,” Tetsuo Iwamura, Honda’s top North American executive, said in an interview on Dec. 2 in Las Vegas. “Next year, even starting this month, we’ll recover.”

Japan’s third-largest automaker counts on the U.S. for the largest portion of its global sales. Tight inventory and competition from Ford Motor Co., Hyundai Motor Co. and Kia Motors Corp. and others cut Tokyo-based Honda’s U.S. sales 5.3 percent through November.

While Honda’s market share has fallen to 9 percent from 10.5 percent so far in 2011, combined share for South Korean affiliates Hyundai and Kia rose to 9 percent from 7.8 percent a year ago.

“It is a year to forget, and then push the reset button,” said Rebecca Lindland, an analyst with researcher IHS Automotive. “We’re now seeing heavy replacement demand, so there is a lot of sales opportunity out there.”

IHS Automotive estimates U.S. sales of new cars and trucks will rise to about 13.3 million units in 2012, from about 12.7 million this year, she said.

“The competition is outrageous and it’s coming from every part of the market,” Lindland said. “Every year we say this is an incredibly competitive market, but this year we mean it.”

Honda’s immediate goal is to boost production of its new Civic compact and CR-V compact sport-utility vehicle that goes on sale this month, Iwamura said. The company starts December with about a 40-day supply of vehicles, he said.

“Unfortunately, our competitors didn’t show us any mercy,” Iwamura said. “They took as much market share from us as they could. That’s the reality of the market. You have to fight back.”

In 2012, the company releases a revamped Accord, Honda’s top-selling U.S. nameplate, and other models Iwamura declined to identify. “Fortunately, we are going to have lots more models in the next 24 months,” he said.

Vehicles coming out next year will also begin powered by new four- and six-cylinder engines and transmissions Honda unveiled last week at the Tokyo Motor Show, claiming they will lead the industry in fuel efficiency.

The company also will add new hybrid models from next year that will boost its reputation for fuel-efficiency and advanced technology, he said.

“New models with good technology, yet very value-oriented pricing for the sake of competitiveness,” said Iwamura, 60. “That is our key for a successful year in 2012 and onwards.”

Sales of the new Civic, released this year, will continue to increase and haven’t really been hurt by some critical reviews, he said.

“In November, Civic was the number one selling compact vehicle,” Iwamura said. “Customers still believe in the Civic.”

The 2012 Civic failed to receive the “recommended” status from Consumer Reports magazine. The revamped model “ranks near the bottom of its category,” David Champion, senior director of the magazine’s auto test center, said in an Aug. 1 e-mailed statement.

Honda’s U.S. headquarters are based in Torrance, California. The company’s American depositary receipts rose 0.5 percent to $31.63 at the close in New York.

The Center for Auto Safety said in a letter Monday to the National Highway Traffic Safety Administration that it wants a civil penalty against Honda “for failing to initiate a timely recall of defective driver airbag inflators that rupture and send shrapnel into the driver,” reported The Detroit News.

Honda didn’t immediately comment on the letter Monday.

On Friday, Honda said it was recalling 876,000 vehicles in the United States for airbag problems. It’s the fifth separate recall for the issue since 2008.

In total, Honda has recalled 2.53 million vehicles in the United States — and 2.7 million worldwide — over faulty airbags that could injure drivers in what is Honda’s largest-ever recall.

The airbags have been linked to about 20 incidents.

Honda said it will replace airbags in 272,779 2001-2002 vehicles because some airbags may inflate with too much pressure.

That pressure can cause the inflator to rupture. As a result, metal fragments could pass through the airbag cushion, causing injury or death to vehicle occupants, Honda said.

Honda is also recalling another 603,421 vehicles to find 640 replacement parts.

This recall now includes 2001-02 Accord, 2001-03 Civic, 2001-03 Odyssey, 2002-03 CR-V, 2003 Pilot, 2002-03 Acura 3.2 TL and 2003 Acura 3.2 CL vehicles.

The latest recall was prompted by a crash and injury in August in Florida in a Honda that hadn’t been recalled, Honda spokesman Chris Martin said Friday. That prompted Honda to reassess whether it had recalled all potentially faulty airbags.

Martin said Honda is now confident it has found all potentially faulty vehicles.

At least 18 injuries and two deaths have been linked to the issue, including an 18-year-old Oklahoma high school student, Ashley Parham, who died in May 2009 when metal shards hit her after the airbag deployed in her 2001 Accord.

“Honda’s submissions to NHTSA fail to disclose what it knew and when in dragging out the recall,” the group said.

A NHTSA spokeswoman, Lynda Tran, said the agency has received the letter. “We have received the letter and will respond accordingly,” she said.

In August 2009, NHTSA sent a letter to Honda asking questions about whether the automaker had recalled enough vehicles for the issue.

Honda said it is aware of several incidents related to this recall and expansions, and is announcing this further recall expansion to encourage all owners of included vehicles to take their vehicle to an authorized dealer.

It is very rare for NHTSA to seek to impose civil fines on automakers for failing to recall vehicles in a timely manner.

In 2010, Toyota Motor Corp. agreed to pay $48.8 million in federal fines, settling three federal investigations that found the automaker delayed recalling about 6 million vehicles. In total, the three fines are the largest ever in U.S. history.

In 2004, General Motors paid the previously largest fine — $1 million — to settle charges that it failed to conduct a timely recall to correct a safety defect. The problem involved windshield wiper failure in 581,344 vehicles manufactured in 2002 and 2003.

Under the law, the current maximum fine for failing to recall vehicles in a timely manner is $17.35 million.

Nissan, whose U.S. sales in November grew 19 percent, aims to surpass rival Honda as the No. 2 Japanese brand in America, reported The Wall Street Journal.

“I can’t see any excuse for not overtaking Honda in the U.S. market,” Nissan Executive Vice President Colin Dodge said in an interview earlier this week.

Noting that Nissan outsells Honda everywhere the two brands compete globally except the U.S. and Thailand, Mr. Dodge said targeting his Japanese rival is crucial to Nissan’s quest to boost its U.S. market share to 10 percent from the current 8 percent.

“I find it unthinkable that Nissan won’t be at 10 percent of the market,” he said. “It’s just a matter of when.”

Honda’s U.S. market share has fallen to 9.1 percent so far this year, compared with 10.6 percent at this time last year. Toyota Motor Corp. is the leading Japanese auto brand in the U.S., with 12.6 percent of the market.

As it is for Honda, the U.S. is a key market for Nissan and second only to China globally. Nissan’s sales in the U.S. rose 18 percent to 908,570 vehicles last year, compared with a 7 percent U.S. sales gain by Honda to 1.2 million vehicles. Nissan said Thursday that its U.S. sales in November increased 19 percent from a year earlier to 85,182 autos amid strong demand for the company’s Rouge compact sport-utility vehicle and Frontier pickup truck.

Nissan has high hopes for growth in the compact segment that Honda dominates in the U.S. with its Civic model. The latest generation of that Honda vehicle has received negative reviews for poor handling and substandard quality, prompting questions about whether the Civic will remain the top-selling compact in the U.S.

Honda President Takanobu Ito acknowledged the cool reception for the new Civic on Tuesday, telling reporters in Tokyo that he took personal responsibility for the problematic launch. “There are mixed opinions of views about the Civic in the U.S. market,” Mr. Ito said. “I believe that ultimate responsibility rests with me.”

People familiar with Honda’s plans say it will likely pull forward a midcycle refresh of the Civic for the 2013 model year, which goes on sale next fall. Normally, such face-lifts don’t occur until two to three years after a launch.

The Civic’s problems signal opportunity for other compact vehicles, such as Ford Motor Co.’s Focus and Hyundai Motor Co.’s Elantra. Mr. Dodge said that Nissan also wants a larger slice of that market with its latest-generation compact, the Versa.

“Nissan’s never been represented in that segment with a market share or profit base up to our potential, so we are expecting a lot from our new Versa,” the British-born executive said.

Mr. Dodge added that he wants the car, which is made at a Nissan plant in Mexico, to grab 10 percent of the compact market “within two to three years,” up from the high single-digit percentages currently.

Nissan also plans to upgrade the engine in its Titan full-size pickup truck and seek to double that vehicle’s U.S. sales, he said.

In a sign of Nissan Chief Executive Carlos Ghosn’s confidence in Mr. Dodge, he is in charge of all regions globally except China and Japan. In June, the Nissan board member added North, South and Central America to his existing regional responsibilities for Africa, Europe, India and the Middle East.

Mr. Dodge, whose first automotive job was as a night-shift manager in the former Rover Cowley plant, joined Nissan in 1984 and spent the next 26 years at the company’s U.K. operations. In 2007, after leading the auto maker’s U.K. supply-chain management, he was named a global senior vice president in charge of emerging markets, including China.

In addition, CEO Ghosn named Mr. Dodge “chief recovery officer” amid the onset of the global financial crisis in 2009, a year when the company’s world-wide sales slid 9.4 percent. Mr. Dodge’s title was switched to global performance officer earlier this year after Nissan’s world-wide sales rebounded in 2010, rising 22 percent to 4.1 million vehicles.

“Ghosn takes the strategy and I try to relieve him of the grubby details of getting the job done on a daily basis. It seems to work quite well,” Mr. Dodge said.

Among the senior executive’s goals for the U.S. is an improvement in customer service and inventory control. He said that U.S. dealerships might be encouraged to use Apple Inc.’s iPads, something that Nissan has done successfully in Mexico.

Mr. Dodge wants to drastically cut the number of cars sitting in lots and in transit in the U.S. by “pushing” hotter products instead of waiting for orders to “pull” them to showrooms. Stockpiled inventories in Europe have been nearly eliminated for models such as the Qashqai, a crossover vehicle sold as the Rogue in the U.S., he said.

They “go straight from our factory to our dealers, as if they were still warm” from the assembly line, Mr. Dodge said, adding that the streamlining has improved free cash flow and improved relations with Nissan dealers.

If implemented in the U.S. and elsewhere, Mr. Dodge said the strategy could boost global operating profit as much as 1 percent. As part of Nissan’s midterm plan, the company has targeted raising its operating-profit margin to 8 percent by early 2017 from 6.1 percent in 2010.

Deliveries fell 7.9 percent from a year earlier for Toyota, Asia’s biggest automaker, and 0.5 percent for Honda, as both of the Japanese companies did better than analysts had estimated. Sales rose 18 percent for Nissan, 23 percent for Hyundai and 21 percent for Kia Motors Corp, reported Bloomberg. Overall U.S. auto sales grew 7.5 percent, according to Autodata Corp.

“We came up a little short,” Bob Carter, Toyota’s group vice president of U.S. sales, said on a conference call yesterday, blaming a lower-than-expected supply of Corolla small cars. A sales gain in October “was an aggressive goal, given our inventory situation at the time, but something we wanted to shoot for.”

Toyota and Honda are trying to rebound from output losses caused by Japan’s March earthquake and now must contend with possible parts shortages due to flooding in Thailand. Even with their declines, industrywide U.S. sales rose to a seasonally adjusted annual rate of 13.3 million cars and light trucks, beating the 13.2 million average of 14 analyst estimates in a Bloomberg News survey. It was the fastest pace since February.

Toyota sales were expected to fall 9.1 percent, the average of five estimates. The average for Honda was a 2.5 percent drop.

Among U.S.-based competitors, General Motors Co.’s sales rose 1.7 percent, Ford Motor Co.’s grew 6.2 percent and Chrysler LLC reported a 27 percent increase.

Toyota fell 2.4 percent to 2,535 yen as of 9:25 a.m. in Tokyo trading, compared with a 2 percent decline in Japan’s Nikkei 225 Stock Average. Honda lost 2.6 percent and Nissan dropped 2.5 percent. Hyundai lost 0.2 percent in Seoul.

“The pace for both Toyota and Honda through the first three weeks of the month was pretty strong, so it still seemed possible” that they would report sales gains, said Jesse Toprak, an analyst at TrueCar.com, an industry pricing and data service in Santa Monica, California. “The meltdown in the financial markets the last few days of the month and unseasonable weather in the East Coast did play a role in slowing sales at the end of the month.”

Toyota’s Carter forecast an October gain after the Toyota City, Japan-based company reported September sales. Tokyo-based Honda’s U.S. sales chief John Mendel predicted a sales increase in an interview last week.

Toyota reported sales of 134,046 Toyota, Lexus and Scion vehicles last month, a drop from 145,474 a year earlier.

The October decline cut Toyota’s U.S. market share for the month to 13.1 percent from 15.3 percent a year earlier, according to Woodcliff Lake, New Jersey-based Autodata.

Production is still improving, and supplies of the new Camry sedan jumped to 35,000 units for sale this month, Carter said. Still, Toyota canceled overtime shifts at North American plants in Indiana, Kentucky and Canada as it assesses the effect of the Thai floods on parts.

Honda, which Mendel estimates missed out on 200,000 deliveries since the March earthquake, may lose some U.S. and Canadian output through late December because of parts shortages caused by the floods, he told dealers this week.

“The Japanese, who are just putting inventory back on dealer lots, are now going to be again faced with more production shortfalls,” Maryann Keller, principal of a self- titled auto-industry consulting firm in Stamford, Connecticut, said in a Bloomberg Radio interview. U.S. auto sales are still “in a modest upward trend,” she said.

Honda’s October sales fell to 98,333 Honda and Acura vehicles from 98,811 a year earlier. The company said that adjusting for one fewer selling day compared with October 2010, the deliveries rose 3.3 percent.

The company’s market share for the month was 9.6 percent, down from 10.4 percent a year earlier, Autodata said.

Nissan, Japan’s second-largest automaker, said its U.S. sales rose 18 percent last month, beating the 16 percent average of five analyst estimates. The Yokohama-based company’s deliveries totaled 82,346, up from 69,773, including gains of more than 40 percent for Versa and Sentra small cars and a 37 percent increase for Juke crossovers.

Market share for Nissan rose to 8.1 percent from 7.3 percent, according to Autodata.

“We’d have done even better if it weren’t for that northeaster that screwed things up in the East Coast,” Al Castignetti, Nissan’s vice president of U.S. sales, said in an interview. He estimated that the Nissan brand lost about 1,000 sales last weekend as a result of the storm.

The U.S. Northeast’s biggest October snowstorm in decades knocked out power to more than 3 million homes and businesses.

Hyundai, South Korea’s largest automaker, reported a sales increase of 23 percent to 52,402 units for the month. The Seoul- based company’s gains were led by Sonata and Elantra sedans and the new three-door Veloster hatchback.

Kia, a Hyundai affiliate and South Korea’s second-biggest automaker, said its sales rose 21 percent to 37,690 vehicles, paced by deliveries of Optima sedans and Soul wagons.

Combined sales for the two companies, which operate separately, increased 22 percent in October. The average estimate of three analysts was for a 15 percent gain.

Hyundai’s U.S. market share advanced to 5.1 percent from 4.5 percent a year earlier, while Seoul-based Kia’s was up 0.4 percentage point to 3.7 percent, Autodata said.

“I don’t think Hyundai can continue to grow at this 20 percent pace next year,” said Toprak, the TrueCar analyst. “But we should still see stable growth for Hyundai and Kia through 2012.”

Subaru, the auto brand of Japan’s Fuji Heavy Industries Ltd., reported a 12 percent decline, while Mazda Motor Corp.’s deliveries grew 1.7 percent. Mitsubishi Motors Corp.’s sales declined 14 percent and Suzuki Motor Corp.’s fell 4.7 percent.

On Monday, Honda said it was powerless to stop the forces afflicting it, withdrawing a profit forecast for the fiscal year and posting earnings that declined 56 percent on production disruptions and weak sales for the quarter ended Sept. 30, according to The Wall Street Journal.

Honda’s position bodes ill for other major Japanese car makers and exporters set to release their earnings in coming weeks. The dollar rose from recent postwar lows against the yen on Monday, up 3 percent at ¥78.18, but still shy of the level that big Japanese auto makers have based their fiscal-year forecasts. Honda now expects the dollar to average ¥75 for the second half of the fiscal year ending in March, compared with ¥80 previously.

A strong yen undermines the price competitiveness of Japanese-made autos and other goods and reduces the value of profits earned overseas.

On top of the high yen, Japan’s big exporters have been hit by a shortage of autos, electronics and other parts made in Thailand, where flooding has swamped a big swath of its industrial areas. Honda and Toyota both cut production at plants in the U.S., Canada and Asia as a result of the disruption.

Citing the uncertainty brought about by the Thai flooding, Honda officials said it might be difficult to resume production in Thailand in the next few months and a sales executive warned that some U.S. customer orders might not be delivered until December or January.

“Frankly speaking, there is nothing we can do,” Honda Chief Financial Officer Fumihiko Ike said Monday during a briefing on quarterly results. Honda last month said it would reduce exports from Japan by 50 percent over the next decade because of the strong yen.

Troubles related to the yen and the Thai floods come as both Honda and Toyota are working to get back to normal operations in the wake of the March 11 earthquake and tsunami in Japan.

Because of shortages of vehicles made in its Japanese plants, Honda is on track to lose more than a percentage point of U.S. market share this year, and Toyota nearly three points of share.

Since the end of 2009, Toyota’s U.S. market share has dropped 4.5 percentage points to 12.5 percent through September, a staggering decline in its biggest and most profitable market.

But the problems go beyond production disruptions. Consumers aren’t as enamored with the two auto makers’ vehicles as they have been in the past. Toyota in particular was hurt by the recall and quality issues it suffered in 2010 that traced to a gas-pedal design that became trapped by floor mats.

Honda’s redesigned 2012 Civic compact has been heavily criticized for a less-than-luxurious interior and old technology. For example, it has a five-speed transmission while competitors including the Chevrolet Cruze and Hyundai Elantra, have a six-speed drive. Consumer Reports magazine, which for years gave the Civic glowing reviews, dropped the new model from its recommended list.

Now Honda must do a makeover on the Civic to spice up sales, said Rick Case, whose Ft. Lauderdale, Fla., dealership is among the largest in the U.S. “We’ve been going along pretty consistently for 40 years, until now. Now we don’t know what’s going to happen with it.”

Mr. Case said his store’s sales are finally starting to recover after months of supply shortages caused by the earthquake. His business will be up 20 percent in October compared to September. “But I’ll still be down 20 percent from a year ago,” he said.

At the same time, vehicles made by the Detroit auto makers have become more much competitive, and Hyundai Motor Co. of South Korea and Nissan Motor Co., which has ramped up production after the March earthquake much faster than Toyota and Honda, have been gaining customers.

Of all challenges Honda and Toyota face, the rising yen is the most serious, say industry experts. On Monday, the Japanese government, which is worried that companies will move production and jobs out of Japan to reduce costs, intervened to prop up the yen.

Honda is already rethinking its dependence on auto production in Japan. Earlier this year it said it is planning to build a plant in Mexico to produce the Fit subcompact, a car now exported from Japan. Nissan has made similar moves. It now produces one model in Thailand and exports it to Japan, a move that was once unthinkable. Japanese chip maker Elpida Memory Inc. and consumer electronics maker Panasonic Corp. also said they should or would shift production overseas.

So far, Toyota has resisted the trend, insisting it remains committed to making three million cars a year in Japan. It exports half of those vehicles. Toyota reports its second-quarter earnings on Nov. 8.

For its latest quarter, Honda said its profit fell to ¥60.4 billion ($796.5 million) from ¥135.9 billion a year ago. On Tuesday, analysts expect the company to report that its U.S. sales declined in October from a year ago.

The reversal of fortune for Toyota and Honda is a remarkable change because 2009 marked the bankruptcies of General Motors Co. and Chrysler Group LLC, a time when the U.S. market shares for Toyota and Honda reached their zenith.

Honda and Toyota are also well behind GM and Volkswagen AG in China, now the world’s largest auto market, and have dealt with labor discord there that other auto makers have been able largely to avoid.

“For a long time we’ve known the yen is going to continue to strengthen over time and Japan become a higher cost of production base, and those companies that were able to move more quickly to lower-cost countries will benefit,” said Jim Press, a former Toyota board member and chief of North American operations, who now consults for Nissan. “It’s a long-term trend and some have been able to be more proactive.”

Toyota, meanwhile, has been adamant about keeping a sizable production base in Japan. Earlier this year, it opened its first new domestic manufacturing plant in rural northeast Japan to export subcompacts. It’s difficult to make money on small cars even with normal exchange rates, but nearly impossible now.

Inside Toyota, there is division among the company’s leadership about moving more production outside its home market.

Chief Executive Officer Akio Toyoda has been steadfast in his desire to maintain plants in Japan, where he feels the expertise of the workers gives the company a global edge. But Chief Financial Officer Satoshi Ozawa has said on two occasions that he isn’t sure it is reasonable to continue doing so.

An adviser to Mr. Toyoda said he is fighting off pressure from other executives to shift more production out of the country, seeing the currency fluctuation as temporary.

Toyota is noted for taking a long view and is willing to wait for the yen to weaken rather than move production, which would require a 10-year training period for the company to feel workers and management are up to speed.

In the early 1990s, the yen strengthened and it hurt Toyota, but the currency later weakened again and led Toyota to report huge profits.

In fact, just five years ago, Toyota executives were privately complaining that they had overbuilt factories in the U.S. at the expense of Japan when the yen was trading at upwards of 120 to the U.S. dollar.

Honda said it is recalling 310,773 2009-2011 Pilot SUVs over some faulty driver and passenger seat belts. Honda said the seat belt anchor webbing may not have been properly completed during sewing and the seat belt anchor could detach, reported The Detroit News.

Honda said the first claim occurred in May 2010 of a seat belt anchor detaching and a second claim was made in July, prompting an investigation and recall. Honda will notify owners starting next month and dealers will replace the seat belts if necessary.

Subaru said it was issuing two recalls covering about 400,000 recalls. One covers 300,000 vehicles sold or registered in 20 states — including Michigan, Ohio, New York — and Washington, D.C., to replace potentially rusty brackets on the underside of the vehicles.

The recall covers the 2002-2007 Impreza, 2003-2008 Forester and 2005-2006 Saab 9-2x. Subaru said it had reviewed complaints of front lower control arms broken at hanger brackets due to corrosion caused by road salt.

Dealers will inspect the front lower control arms and will rust-proof them or replace them with new ones. Owners will be notified by early November.

The National Highway Traffic Safety Administration had opened an investigation into the issue in April after receiving seven complaints, including two failures on the highway at high speeds.

The second recall covers 195,000 2010-2011 Legacy and Outback to replace the windshield wiper bottom cover, which could catch fire or stop working.

Subaru said it received a complaint of smoke from a wiper motor in January and began an investigation. Owners will be notified by November.

Worldwide production at Toyota Motor Corp. fell 6.1 percent from a year earlier to 594,614 vehicles, the company said Tuesday. Its domestic sales of passenger cars, trucks and buses tumbled more than 35 percent, and exports fell 5 percent due to weaker shipments to North America, according to The Detroit News.

Toyota, however, said its production returned to levels that were near to what it had planned before the March earthquake and tsunami struck Japan’s northeastern coast, wiping out auto parts suppliers.

The automaker is preparing to ramp up production in the coming months to make up for the capacity lost to the disaster. Between October and March 2012, the automaker plans to build an extra 350,000 vehicles.

The numbers were worse at Honda Motor Co., where global production tumbled more than 34 percent to 206,727 vehicles in July. It was the sixth straight month of decline.

Honda’s domestic sales of vehicles fell 31.5 percent and exports retreated more than 19 percent.

Standing above the crowd was Nissan Motor Co., which continued to gain momentum and set company records in July.

The Yokohama-based automaker recorded an almost 18 percent jump in worldwide output to 388,680 vehicles — its best-ever July performance. Production in the U.S. benefited from stronger demand for the Altima sedan, Nissan said.

Although Nissan’s Japan sales fell 17 percent in volume terms, global sales overall rose 8 percent. Exports surged more than 23 percent.

Among Japan’s other car makers, Suzuki Motor Corp. posted a 3.6 percent decline in global production to 228,147 vehicles.

Worldwide output at Mazda Motor Corp. fell almost 13 percent to 103,384 vehicles. At Mitsubishi Motors Corp., it declined about 5 percent to 97,862 vehicles.

A prolonged drop in U.S. equities will lead to a decline in consumption and delayed car purchases, Honda Chief Financial Officer Fumihiko Ike told reporters in Tokyo today. The company is also concerned the yen may strengthen to the low 70s against the dollar, further hurting earnings from exports, Ike said.

U.S. stocks yesterday sank the most since December 2008 and European stocks today retreated for an eighth day, the longest losing streak since 2003, according to Bloomberg. Federal Reserve policy makers will hold a one-day meeting today as last week’s downgrade of the U.S.’s top credit rating by Standard & Poor’s fuels speculation the world’s largest economy may be headed for a recession.

“The question is what will happen to the macro economy and whether the current turmoil will persist over a prolonged period,” Ike said. “This is a new scenario” not incorporated into Honda’s current forecast, he said.

Honda raised its full-year net income forecast by 18 percent to 230 billion yen ($2.98 billion) on Aug. 1 on a quicker-than-expected recovery from the March 11 earthquake. The carmaker is basing its fiscal year forecast on 80 yen to the dollar and 112 yen to the euro.

“In the U.S., consumers react to the market very quickly, so it’s very possible that the consumer mindset will turn negative, and that people will refrain from purchasing new cars,” said Yuuki Sakurai, president of Fukoku Capital Management in Tokyo.

The Japanese currency today rose to as much as 77 against the dollar as investors shunned the U.S. currency after Standard & Poor’s cut the rating on the U.S.’s long-term debt to AA+. The yen’s strength last week prompted the government to sell the nation’s currency for the first time since March 18. A stronger yen cuts the value of repatriated profits from exports.

The Tokyo-based carmaker can meet its full-year forecast announced on Aug. 1 if the yen returns to 80 yen to the U.S. dollar, Ike said. Multilateral intervention is needed to prop up the dollar as last week’s unilateral action has proven to be ineffective, he said.

Every one yen gain against the dollar cuts Honda’s operating profit by 15 billion yen. A one yen gain against the euro reduces profit by 1 billion yen.

Honda has hedged against the dollar at 80 to 81 yen through the fiscal second quarter, Ike said.

While Honda has been conservative in estimating the U.S. auto market’s overall demand at 12.4 million units this year, “we will have to see how big the shock will be,” Ike said. The biggest risk is a global “chain reaction” from the U.S. and Europe, particularly to Asian economies that are tied to the U.S. dollar, he said.

Honda expects its sales in North America this fiscal year to drop 5.7 percent to 1.38 million units, it said on Aug. 1.

“Honda and other Japanese carmakers have been making up for lost production after the earthquake at a faster pace than expected,” said Masatoshi Nishimoto, an analyst at consulting company IHS Automotive in Tokyo. “If the U.S. market stalls, they’ll have to put the brakes on exports.”

Honda fell 2.8 percent to 2,722 yen at the 3 p.m. close in Tokyo, while the Nikkei 225 Stock Average declined 1.7 percent.