Honda is being hit by tough competition in its home market

Japan's second-largest carmaker, Honda made a net profit of 592.3bn yen ($5bn; �2.5bn) for the 12 months to 31 March, down from 597bn yen a year earlier.

The company said its domestic sales fell 3.4% to 672,000 units, compared with an 11% gain in foreign sales and 12% increase in total annual revenues.

Honda now expects profits to fall 3% in its current financial year.

Extremely weak

Honda said that the decline in its latest annual profits, which came after four years of record increases, was also caused by costs related to changes in its model range, and increased spending on research and development.

It was also hit by a comparison with a one-off tax gain in the year to 31 March, 2006.

The fundamental business remains robust Honda

Honda said that all these factors offset its higher overseas sales and the benefit of a weaker yen.

For its current financial year to the end of March 2008, Honda expects to see net profits decline to 575bn yen, despite it predicting a further 7.7% rise in overall unit car sales.

Despite Honda's insistance that its "fundamental business remains robust and we expect continued growth, especially in North American and Europe", many analysts were not convinced.

"The forecast for 2007/08 is extremely weak," said Credit Suisse analyst Koji Endo.