A weak dollar and an even weaker U.S. economy have proved to be serious roadblocks for Toyota Motor Corp. (TM), which reported a 28% decline in net income for its fiscal fourth quarter.

The company said it expects its first annual profit drop in nine years to occur in fiscal year 2009, despite strong sales in developing markets.

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High oil prices helped boost the sale of smaller more fuel-efficient cars in the United States, but overall region sales declined.  Fourth-quarter sales of the Toyota Yaris were up 58% and Prius sales shot up 23%. Still, Toyota’s total North American sales fell to $20.2 million in the quarter ended March 31, a 7% drop from the year prior.

Toyota’s net income for the quarter fell to $3 billion, down from $4.2 billion a year earlier. Worse, the company forecasted a 27% decline in profit for the upcoming fiscal year, and an annual sales drop of 4.9%, to $240.4 billion.

"We are facing a severe business environment," President Katsuaki Watanabe said in a statement. "However, Toyota considers this headwind as a valuable opportunity to turn it into a more flexible and stronger company. To this end, we will aim to eliminate waste and review the process and structure of every aspect of our operations."

A weak dollar compounded the company’s troubles in an already soft U.S. market. The yen has gained about 15% on the dollar in the past year, further eroding the value of sales in the United States. The company said the yen’s rise against the dollar would likely shave $6.5 billion off operating profit in 2009. Rising material prices, also attributable to the dollar’s slide, are eating into the company’s profit margins as well.

While Toyota expects that U.S. sales will shrink from 16.1 million vehicles in 2008 to the low 15 million range, the company is banking on emerging market growth going forward. 

Global sales were a different story. For 2008, Toyota’s saw a 5% sales increase in Europe, a 21% spike in Asia sales, and an 18% increase in South America, Oceania, Africa and the Middle East.

"Our profit structure has become more geographically balanced, with growing contribution from resource-rich countries and emerging countries," Watanabe said.

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