June 29 (Bloomberg) -- Toyota Motor Corp. and Honda Motor Co., Japan’s two largest carmakers, led a decline in domestic auto production last month as exports to the U.S. plunged.

Output by the country’s 12 vehicle makers dropped for an eighth straight month, falling 41 percent to 542,282 units in May from a year earlier, the Japan Automobile Manufacturers Association said in a statement today. Government incentives slowed the decline compared with April’s 47 percent drop.

Domestic sales are lagging behind the auto group’s forecast for the fiscal year, already expected to be the worst in three decades, due to falling wages and growing unemployment, the association said June 18. It predicts Japan industrywide sales will drop 8.5 percent to 4.3 million in the year ending March.

Japan has implemented tax cuts and subsidies on some fuel- efficient cars to spur auto sales. Consumers can apply for a 250,000 yen ($2,600) subsidy if they scrap a car more than 13 years old to buy a new one and 100,000 yen for a new car purchase without scrapping an old one.

The government expects the incentive to lead to the sale of an additional 690,000 vehicles this fiscal year. Electric, hybrid, natural gas, and some diesel vehicles also qualify for an exemption from the country’s weight and purchase taxes.

Toyota’s production in Japan fell 42 percent to 192,637 in May and exports dropped 51 percent, the company said last week. That doesn’t include its Hino and Daihatsu units. Exports to North American plunged 51 percent.

Honda built 52,663 vehicles last month domestically, down 43 percent, the company said. Its exports slumped by 65 percent to 18,156 vehicles. Domestic output at Nissan Motor Co., Japan’s third-largest automaker, fell 36 percent and its exports tumbled 56 percent.

To contact the reporter on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net.

Last Updated: June 29, 2009 00:03 EDT