May 15 (Bloomberg) -- Honda Motor Co., outselling Chrysler LLC in the U.S. this year, plans to lower incentives after curbing production and forecasting a recovery in demand.

The average incentive per vehicle will fall 17 percent to about $1,000 from $1,200 in the year ending March 31, Yoichi Hojo, Honda’s chief financial officer, said in an interview yesterday. Demand is likely to pick up in the second half of the fiscal year, he added.

“We won’t have to offer such large incentives to reduce inventory” this year after adjusting production, he said.

Honda, the only one of Japan’s big three carmakers forecasting a profit this fiscal year, expects to slow the drop in U.S. sales to 4.4 percent in the period from 16 percent a year earlier, helped by the March debut of the Insight hybrid. Last year, the carmaker boosted incentives to clear dealers’ lots after the global recession emptied the nation’s showrooms and pushed General Motors Corp. to the brink of bankruptcy.

“This is one way to recover profitability,” said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets. “However, I don’t think the U.S. market has hit bottom yet.”

The company’s U.S. vehicle inventory ballooned to more than a 100-day supply in the first quarter of 2009, as much as three times the historical average. As a result, North American production will drop 8.7 percent to about 1.14 million units in the current fiscal year, according to the company.

Honda rose 1.5 percent to close at 2,765 yen on the Tokyo Stock Exchange. They have risen 45 percent this year.

Best of the Worst

Japan’s second-biggest automaker posted a U.S. sales drop of 25 percent in April to 101,029 units. That compares with a 42 percent decline at Toyota Motor Corp. and a 38 percent fall at Nissan Motor Co.

Honda’s incentive spending hit a record high $1,439 per vehicle in April, according to Edmunds.com, an industry data provider based in Santa Monica, California. Most of that spending was in the form of lower-cost leases and loans, according to Edmunds.com.

While Honda’s spending was up from $1,334 a month earlier, it was still less than that of its biggest competitors. Toyota spent an average of $1,648 per vehicle, Nissan spent $2,779 and Hyundai Motor Co.’s spending rose to a record $3,591.

Honda expects to sell about 1.25 million vehicles in the U.S., the world’s biggest auto market, this fiscal year, Hojo said. Industrywide sales in the U.S. may reach 10.5 million units in 2009, he said. That compares with an annual rate of 9.1 million units in February, the lowest since 1981.

Honda has been fifth in annual U.S. sales since 1988. Deliveries fell 32 percent through April to 332,014, leapfrogging Auburn Hills, Michigan-based Chrysler after its sales plunged 46 percent to 323,890. The U.S. market has decreased 37 percent.

Insight

Honda sold 2,096 Insights in the U.S. in April, the model’s first full month of sales. The carmaker aims to sell 90,000 units in the country in the first year of sales. It started full-scale advertising this month.

Since its Japanese debut in February, the hybrid has sold 19,475 units and topped the country’s best-seller list excluding minicars for April, the first hybrid vehicle to do so. Sales so far exceed the company’s target of 5,000 units a month.

Honda is talking to battery suppliers about the possibility of increasing Insight production, Hojo said. The decision will depend on demand after Toyota introduces its third-generation Prius hybrid, he said. That model goes on sale domestically on May 18.

Honda doesn’t have a production target for the Insight, which are all built at the Suzuka plant in Japan, said spokeswoman Yasuko Matsuura. Production will be adjusted to demand, she said.

To contact the reporters on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net; Tetsuya Komatsu in Tokyo at tekomatsu@bloomberg.net.

Last Updated: May 15, 2009 03:22 EDT