Feb. 5 (Bloomberg) -- Yamaha Motor Co., the world's second- largest motorcycle maker, forecast the first drop in operating profit in eight years on a stronger yen and falling demand in the U.S. Shares plunged the most in 26 years.

Yamaha said a stronger domestic currency will cut operating profit by 55.5 billion yen this year. U.S. demand for its Royal Star Venture motorcycles and larger rival Honda Motor Co.'s Gold Wings has also fallen as rising home foreclosures and the subprime debt crisis crimps consumer spending.

``This year will be tough for Yamaha,'' said Kazuhito Sasaki, a senior analyst at Tokai Tokyo Research Center Co. in Tokyo. ``Earnings will be hurt by lower sales in the U.S. because of the economic slowdown.''

Yamaha joins Harley-Davidson Inc. in issuing a sober outlook for 2008. Harley, the biggest U.S. motorcycle maker, predicted a ``very challenging'' economy on Jan.25 as it posted a 26 percent decline in fourth-quarter profit and its first annual earnings slide in 14 years.

Yamaha dropped 400 yen, or 15 percent, to close at 2,225 yen on the Tokyo Stock Exchange to the exchange-imposed daily limit after earnings were released. It was the biggest drop since February, 1982.

Yamaha expects 2008 operating profit to fall 19 percent to 103 billion yen ($965 million), it said in a statement today. Sales will rise 4.2 percent to a record 1.83 trillion yen. Net income will fall 17 percent to 59 billion yen.

U.S. Lawsuits

Iwata City, Japan-based Yamaha's fourth-quarter profit plunged 79 percent as it took a one-time charge for liability costs related to its U.S. unit. Yamaha took a 15.5 billion yen charge to cover potential costs from lawsuits in the U.S. related to its Rhino all-terrain vehicles.

Fourth-quarter net income fell to 3.7 billion yen from 17.6 billion yen in the year ago period. Sales gained 3.6 percent to 421.7 billion yen.

The company forecasts an exchange rate of 105 yen to the dollar and 155 yen to the euro for 2008. Last year's earnings were based on 117 yen to the dollar and 156 yen to the euro.

A one-yen increase against the U.S. dollar cuts 2.1 billion yen from operating profit and a one yen increase against the euro will cut 800 million yen, Kozo Shinozaki, general manager of Yamaha's finance and accounting division, said at a press conference in Tokyo.

Operating Profit

Separately, Yamaha forecast operating profit of 143 billion yen in 2010 on sales of 2.1 trillion yen. The company aims to sell 7.78 million motorcycles globally and spend 300 billion yen in capital expenditure over three years. The business plan covers the period from 2008 to 2010.

Yamaha counts on North America for 28 percent of revenue, even as the region only makes up 3.9 percent of unit sales. In contrast, Asia excluding Japan accounted for 75 percent of unit sales and 30 percent of revenue.

Total U.S. motorcycle sales in the fourth quarter probably dropped 6.5 percent, the most since 1991, New York-based UBS AG analyst Robin Farley said in a note last month.

A 110-cc Yamaha Jupiter motorcycle costs about $1,400 in Indonesia, while a Royal Star Venture costs about $17,600 in the U.S.

To contact the reporters on this story: Kiyori Ueno in Tokyo at kueno2@bloomberg.netTetsuya Komatsu at tekomatsu@bloomberg.net

Last Updated: February 5, 2008 09:18 EST