Japan's Honda Motor said yesterday that profits collapsed in the last quarter but it upgraded its outlook as hopes grow that global demand will recover due to government incentives for green cars.

The number two automaker said net profit dived 95.6 per cent in the fiscal first quarter through June from a year earlier to 7.56 billion yen ($80 million), on a stronger yen and weak demand in the US and Europe.

But the results beat both market expectations for a net loss of about 66 billion yen during the quarter. Revenue slid 30.2 per cent to two trillion yen, and operating profit slumped 88 per cent to 25.1 billion yen.

Severe cuts in capital spending as well as robust demand for motorcycles and cars in Asia offset plunges in more mature markets such as Japan and the US, the company said.

The group sold 766,000 cars in the three months to June, down from 962,000 in the same period of the previous year.

The maker of the Insight hybrid and the Civic and Accord cars is banking on stimulus measures around the world to support demand for vehicles, especially in the US, Honda vice president Koichi Kondo told reporters.

"If we take into account the stimulus measures in America and the fact that its population will continue to grow steadily, we will definitely reach sales of 10 million units there, and eventually 14 to 15 million cars," he said.

Washington recently launched a "cash-for-clunkers" allowance rebate system that would allow drivers to trade their less fuel-efficient vehicles for a green car with up to $4,500 of credit.

"While we cannot say yet that the North American market has recovered, sales are picking up this past month, which may be in part due to the 'cash-for-clunkers' system," Mr Kondo said.

Despite the tough first quarter, Honda upgraded its outlook for the full year to March, forecasting a net profit of 55 billion yen - down 59.9 per cent from the previous year - against an earlier goal of 40 billion yen.

Honda is seeking to accelerate the launch of its hybrid vehicles to ride a wave of interest in fuel-efficient cars, helped by government tax incentives.

Earlier this year the company rolled out a revamped model of its flagship fuel-sipping Insight, which was the best-selling hybrid in April in Japan before being overtaken by rival Toyota's remodelled Prius.

While the automaker is honing its hybrid prowess, it will do so with a drastically smaller purse. It expects to cut 209.1 billion yen in capital spending and 48.1 billion yen in research costs in the current fiscal year.