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TOKYO, Oct. 22 -- Global stocks fell sharply on Wednesday as fears of a worldwide recession elbowed its way into Asian and European markets.

With signs that the worst of the credit crisis is easing, weak corporate earnings, rising inventories and falling demand are now in focus from Wall Street to Tokyo.

Stocks in Japan declined nearly 7 percent, while an index of equity shares across Asia fell more than 5 percent -- at one point hitting a four-year low.

South Korean shares hit a three-year low and the country's troubled currency, the won, fell again against the dollar. A $130 billion plan by the Seoul government to strengthen the won, stabilize stocks and restore bank liquidity was announced last weekend, but it has failed, so far, to overcome concern that a global recession will drag down South Korea's export-dependent economy.

European indexes opened lower and headed down further through the day. By early afternoon, major exchanges in the U.K., France and Germany were down in excess of 3.5 percent.

Bank of England head Mervyn King had warned in a Tuesday speech about a possible "sharp and prolonged slowdown," and signaled possible future interest rate reductions.

The likelihood of continent-wide interest rate cuts has helped push the Euro and the pound down sharply against the dollar, with the Euro dipping below $1.30. Crude oil continued its decline, falling below $70 a barrel.

Futures pointed to triple-digit losses when trading on Wall Street opens.

In a sign of an evolving economic slowdown, exporters in Asia are seeing an alarming rise in inventories as demand from the United States and Europe declines, analysts said.

In Japan, major exporters like Toyota, Sony and NEC Electronics are being squeezed between the soaring value of the yen, which makes Japanese goods more expensive, and the eroding willingness of anxious American and European consumers to keep on buying.

Japan's benchmark Nikkei stock index fell 6.8 percent on Wednesday, ending three days of gains. The broader Topix index slumped 7.1 percent.

Not surprisingly, Yahoo just reported third-quarter earnings that were weak but not as awful as some might have expected. However, the company said layoffs of at least 10% of the staff of 14,300 will begin in the fourth quarter—about what reports had anticipated.

They will be part, but not all, of a sweeping cost-cutting effort that is intended to reduce its annual costs of $3.9 billion by about $400 million before the end of this year. “Now we are conducting a deep review of our cost structure to identify more opportunities to enhance efficiency and build a stronger and more profitable Yahoo!,” president Sue Decker said in a statement.

Net profit fell 64% to $54.3 million, or 4 cents a share, from $151.3 million, or 11 cents a share, a year ago. Excluding special items such as stock option expenses, profit fell from 11 cents a year ago to 9 cents a share in the third quarter, precisely what analysts were expecting. However, net revenues, after payments to partners for traffic, rose just 3%, to $1.33 billion, slightly short of the $1.37 billion analysts had forecast.

Yahoo lowered its 2008 revenue outlook to between $7.18 billion and $7.38 billion, from its previous forecast of $7.35 billion to $7.85 billion.

Yahoo Chief Financial Office Blake Jorgensen cited “an increasingly challenging economic climate and softening advertising demand” for Yahoo’s results coming in at the low end of the range it had forecast. Although he said in a statement that Yahoo was “disappointed” in the results, he said cost-cutting during the year so far had helped cushion the economy’s impact on operating cash flow. Free cash flow, after capital expenses, fell 31%, to $151 million, from a year ago.

You can view the results and then listen to the conference call online here. After the jump is my pre-earnings analysis of the many issues facing Yahoo as it reports results and provides an outlook on coming quarters:

UPDATE: Investors so far seem relatively pleased, with the stock up 5% after-hours.

And the call begins with Jerry Yang. He says Yahoo saw “mixed trends,” with search and performance-oriented display ads showing strong growth but “demand for branded display advertising weakened.” So the company is reducing full-year revenue outlook but keeping its operating cash flow outlook thanks to cost cuts, which will be not only layoffs but cuts in real estate, standardization of its technology platform, and other methods.

He says he remains optimistic about Yahoo’s future because the downturn likely will drive advertisers to reliable venues. The latter, at least, is what I’ve been hearing from advertisers and agencies, but the question will be to what extent Yahoo’s entire ad offering will be the most compelling.

“This is in many ways an unprecedented operating environment,” Yang says. “We believe the online ad market will emerge strong, with Yahoo well-positioned to take share.”

Now President Sue Decker comes on to talk about fairly familiar Yahoo products and features, though one detail—page views up 17%—is a positive sign. But she says overall monetization of pages was lower than expected, especially commitments to branded campaigns. Despite strength in search revenues from its own sites, up 17%, display ad revenues on its own sites was up only 3%, much less than double-digit gains in previous quarters.

Decker’s now talking up APT, its new display-ad platform.

Now it’s on to Jorgensen: Two main themes in quarter, already apparent in previous comments: worsening economic environment coupled with greater cost cuts. “We are cautious about the advertising market in Q4. But we feel we are well-positioned to weather the downturn.” Mentions the Asian properties are valued at $7 billion or so, or more than $5 a share—a clear attempt to point out that Yahoo’s stock is undervalued in his view.

Now, the analysts’ questions:

* How is Yahoo going to improve monetization on its own sites? Decker says mainly the display ad platform, APT.

* Any lift in ad rates thanks to APT? Decker says no data yet.

* Where were the cost cuts in the quarter? Jorgensen: All year, actually. Slower hiring, but mainly hiring in lower-cost areas like India, Eastern Europe, and Southeast Asia.

* Any deadline on the Google-Yahoo deal? Yang can’t say, though I’ve gathered from people close to this that the Oct. 22 deadline mentioned widely isn’t actually a deadline. Talking with the Justice Department and others.

* How confident are you in the revenue forecast? Decker: watching weakness in Asia, but she mentions some “stability” in the U.S. despite some ad cancellations in travel and other areas.

* Could there be more consolidation among companies online, and what would Yahoo’s role be? Yang: Says there are opportunities, especially since ad spending isn’t increasing much, so it’s hard to grow that way. But he offers no specifics.

* How do you see your growth rate vs. Google? Yang: “There continues to be a flight to quality with regard to consumer behavior and advertiser behavior.” Decker more specifically acknowledges the obvious, that Google’s growth rate is faster than Yahoo’s, and talks about various ways Yahoo hopes to improve its search offerings for consumers and its search ad system for advertisers.

* Was there a sharp downturn in September? Decker: “The trends weakened in the latter part of August.” First Europe, then Asia. Also weakened in the U.S. but not as much as the rest of the world.

* What’s the ‘09 outlook? Yang, with a hint of a rueful laugh: “I don’t think we have any visibility into ‘09.”

* What’s the impact of acquisitions on revenue? Jorgensen says acquisitions contributed 1% to GAAP revenue.

* In what departments or functions is Yahoo making cuts? Yang doesn’t provide specifics, just the usual things like real estate.

* How will Yahoo unlock shareholder value? Yang says one way is cutting costs. Conservative on share buybacks, though, so that looks unlikely.

* How much of the weak 3% display-ad growth is due to the economy and how much to losing share to ad networks and niche sites? Decker: Can’t really say yet, but says Yahoo is outgrowing the ad networks.

* How sensitive will Yahoo be to diluting shareholders if and when it does acquisitions? Jorgensen: “We’ll clearly be very sensitive to dilution.”

* Last question: Have you considered hedging out exchange risks in various international markets? Jorgensen: Yes, but doesn’t sound like Yahoo plans to do much on that.

And that’s it for the call. The stock’s now up about 7% in extended trading, so if anything, the details from the call reassured investors—at least to the mild extent that they can be reassured about a company facing this many challenges.

Analysts are expecting a profit of 9 cents a share on net revenues, after payments to partners for traffic, of $1.37 billion. But some analysts, who have already cut their estimates for the fourth quarter and next year, think Yahoo could miss those numbers. Yahoo’s stock closed down about 6%, to just over $12 a share, in trading Oct. 21 before the earnings announcement.

Investors also will be looking to see if Yahoo announces layoffs, as recent reports have indicated it might, and how many. Several reports indicated it could cut about 1,500 people out of its staff of 14,300, though it wasn’t clear when and where the cuts would be made inside the company. Yahoo has hired consultant Bain & Co. to help suggest various cost-cutting measures, which could go beyond layoffs.

Like Google’s earnings last week, Yahoo’s will be closely watched for signs of how badly online advertising will be hit by the deepening economic downturn. Google, however, which reported better-than-expected results, was not a good industry bellwether because of its dominance in relatively well-performing search ads.

By contrast, Yahoo is more representative of the broader online advertising market, in particular display ads that are likely to bear the brunt of cutbacks by large brand advertisers. In particular, Yahoo’s heavy reliance on financial services and automobile advertising could hurt it as the effects of the credit crunch worsen. “Their business has been hurting,” says John Aiken of Majestic Research. “The real miss looks like it’s coming on the branded display ads.”

And those cutbacks were already starting even before the market meltdown began about a month ago. According to recently released figures from the Interactive Advertising Bureau and PricewaterhouseCoopers, display advertising declined from the fourth quarter of 2007 to the first quarter of 2008, and also fell again slightly from the first to the second quarter. That hasn’t happened since 2002. “If clients have to cut, digital budgets are not going to escape scrutiny,” says Clark Kokich, CEO of Razorfish, an online ad agency owned by Microsoft. “You’re going to see a softness we haven’t seen for the last few years.”

At the same time, Yahoo faces many other challenges. Since Microsoft walked away from offers to buy the entire company and then only its search business, Yahoo’s stock has fallen—especially after the market meltdown. It’s now trading a little under $13 a share, a small fraction of Microsoft’s original $31-a-share offer. And while Microsoft CEO Steve Ballmer recently appeared to hint that the company is still interested in Yahoo, Microsoft officially quashed that notion.

Yahoo has been discussing a combination with AOL, which parent Time Warner has been shopping for months. The agreement is believed to involve Yahoo taking over AOL for something under $10 billion and Time Warner taking a minority stake in Yahoo. According to people familiar with the companies, Yahoo, bolstered on the media front with AOL, might then be willing to do a search deal with Microsoft from a position of more strength.

However, it’s not clear that such a combination would help Yahoo regain ground lost to fast-growing social networking sites such as Facebook and News Corp.’s MySpace, let alone Google. Despite a monthly audience of 500 million people worldwide, Yahoo has been unable to break into social networking, a key potential growth area.

That’s not all the drama surrounding Yahoo. Its proposed deal to run Google search ads on some of its pages is under intense scrutiny by the Justice Department, which is expected to make a decision soon. Although few people expect the deal to be opposed outright, many legal observers think limits could be placed that would make the deal—which Yahoo said could contribute $250 million to $450 million in cash flow annually—less lucrative.

Not least, Yahoo’s plight also has been sending a steady stream of talent out the door, from engineers to executives. And the layoffs being considered now no doubt would hurt morale even further. That’s especially likely if Yahoo doesn’t announce specific jobs to be cut until later in the year.

The only upside for Yahoo is that its difficulties could be priced into the stock already, leaving relatively little downside. However, few people expected Yahoo’s stock to fall this far. So for now, all bets are off.

Sagging corporate profits weighed on investor confidence today, sending stocks down.

The gap between rich and poor is getting bigger in the world's richest countries -- and particularly the United States -- as top earners' incomes soar while others' stagnate, according to a 30-nation report released Tuesday.

In a 20-year study of its member countries, the Paris-based Organization for Economic Cooperation and Development said wealthy households are not only widening the gap with the poor, but in countries such as the U.S., Canada and Germany they are also leaving middle-income earners further behind, with potentially ominous consequences if the global financial crisis sparks a long recession.

Inequality threatens the "American Dream" of social mobility -- children doing better than their parents, the poor improving their lot through hard work -- which is lower in the U.S. than countries such as Denmark, Sweden and Australia, the report found.

The two decades covered in the study -- 1985-2005 -- saw the development of global trade and the Internet, and a period of overall strong economic growth. The countries covered are mostly developed nations, especially in Europe.

The United States has the highest inequality and poverty in the OECD after Mexico and Turkey, and the gap has increased rapidly since 2000, the report said. France, meanwhile, has seen inequalities fall in the past 20 years as poorer workers are better paid.

OECD Secretary-General Angel Gurria said that the study, which took three years to complete, would be useful to policymakers because it is coming out just as the world is undergoing "the worst crisis in decades."

With several OECD countries already in recession, the "key question" raised by the report is whether governments can prevent a possible drop in top earners' incomes from sparking "a second wave" hit to the lowest-income households, Martin Hirsch, France's high commissioner for fighting poverty, said at a news conference.

Also speaking at the report's presentation, Oxford University economist Anthony Atkinson noted that the widening inequality gap had coincided with a period of strong economic growth.

"What will happen if the next decade is not one of world growth but of world recession? If a rising tide didn't lift all boats, how will they be affected by an ebbing tide?" Atkinson said.

With governments around the globe announcing trillions of dollars in rescue financing to shore up banks, "I think that citizens of OECD countries are going to expect that if you can find funds to rescue banks, then governments can fund an effective unemployment insurance scheme, and they can fund employment subsidies," Atkinson said.

Atkinson said governments need to act to support employment as a response to widening inequality and faltering economies.

"If the government can take on the role of lender of last resort, then we should think about the government taking on the role of employer of last resort. Put bluntly, governments have to step up. Step up to the plate as Roosevelt did in the Great Depression," Atkinson said.

The OECD's Gurria urged governments to address the "divisive" issue of growing inequality. He said they should do more to educate the whole work force -- and not just the elite -- while helping people get jobs and increasing incomes for working families, rather than relying on social benefits.

"Greater income inequality stifles upward mobility between generations, making it harder for talented and hardworking people to get the rewards they deserve," he said in a statement. "It polarizes societies, it divides regions within countries, and it carves up the world between rich and poor."

In the United States, the richest 10 percent earn an average of $93,000 -- the highest level in the OECD. The poorest 10 percent earn an average of $5,800 -- about 20 percent lower than the OECD average.

Social mobility is lowest in countries with high inequality such as the United States, United Kingdom, and Italy, the report said.

Pfizer Inc.'s profit tripled in the third quarter, mainly because a huge charge depressed last year's results, despite flat sales. Its earnings narrowly beat Wall Street's earnings expectations.

But the company behind impotence treatment Viagra and the top-selling cholesterol fighter Lipitor reduced its earnings forecast for 2008 even as it raised the lower end of its revenue forecasts for the year.

Its shares rose 44 cents, or 2.5 percent, to $17.78.

Pfizer said it earned $2.3 billion, or 34 cents per share, in the July-September quarter, up from $761 million, or 11 cents per share, a year ago.

Excluding one-time items, net income amounted to $4.18 billion, or 62 cents a share -- 2 cents a share more than analysts surveyed by Thomson Reuters expected.

In the current quarter, the New York-based company took a charge of $894 million for a settlement announced Friday to end most of the lawsuits over its withdrawn painkiller Bextra and another pain reliever still on the market, Celebrex. It also had $716 million worth of charges related to its cost-cutting program and other one-time items.

A year ago, Pfizer took a $2.1 billion after-tax charge in the third quarter, related to its decision to stop selling inhaled insulin product Exubera, which had dismal sales and then was linked to risk of lung cancer.

Pfizer said its revenue slipped to $11.97 billion from $11.99 billion a year ago, even though favorable exchange rates due to the weak dollar boosted sales by 5 percent. Analysts had been expecting revenue of $12.01 billion.

Pfizer reported a 13 percent drop in U.S. sales of Lipitor. Total revenues from Lipitor, the top-selling drug in the world, were down 1 percent at $3.14 billion.

The company said revenues for three drugs with recent generic competition -- blood-pressure medicine Norvasc, allergy drug Zyrtec and colon-cancer drug Camptosar -- fell by 48 percent, or a combined $627 million.

Several other drugs had double-digit sales increases, including Viagra, fibromyalgia drug Lyrica, schizophrenia and bipolar disorder treatment Geodon and Aricept for Alzheimer's disease. Celebrex sales rose 8 percent to $625 million amid a new ad campaign.

Pharmaceutical sales totaled $10.98 billion , animal health sales were up 11 percent to $708 million and other revenue dropped 9 percent to $289 million.

"We remain on track to meet our 2008 objectives, despite the turbulent global economy," Chief Executive Jeff Kindler said in a statement.

The company noted it has cut annual costs by a total of $1.7 billion from 2006 levels and now expects to get to $2 billion in reductions by the end of this year. Those cuts include reducing the work force by 14,600 people since January 2007. Job cuts and closure of several manufacturing plants helped slash Pfizer's cost of sales by 54 percent in the quarter, to $2.1 billion.

The company reduced its earnings per share forecast for 2008, to a range of $1.61 to $1.71, from $1.73 to $1.88, citing the Bextra settlement. It also raised the lower end of its revenue forecasts for the year, from $47 billion to $48 billion, but kept the top end at $49 billion.

"With our strong balance sheet and operating cash flow, we remain confident that we have the financial flexibility to successfully execute our strategies and meet our financial objectives in the face of the current macroeconomic environment," Chief Financial Officer Frank D'Amilio said in a statement.

For the first months, net income rose 45 percent, to $7.84 billion or $1.16 per share, from $5.42 billion or 78 cents per share in the January-September period of 2007. Revenues edged up 1 percent, to $35.95 billion.

Executives from Silicon Valley to Madison Avenue are keeping a wary eye on the Justice Department this week as it nears a decision on whether to try to block an Internet advertising partnership between Google Inc. and Yahoo Inc.

After months of studying the arrangement, government antitrust attorneys could move any day now to sue to stop it from taking effect -- or they could abandon a potential court challenge and allow the partnership to proceed.

Under the terms of the deal, Google will sell some of the online advertisements displayed alongside search results on Yahoo's site. Yahoo entered the partnership in June after rebuffing a $47.5 billion takeover offer from Microsoft Corp. -- sparking a shareholder backlash.

With the Justice Department investigation shrouded in secrecy, it is unclear when a decision could come. But after Google and Yahoo agreed this month to a "brief delay" in launching their deal to allow the government to complete its probe -- and perhaps to try to reach a settlement -- many observers expect an announcement by midweek.

The stakes are high. The Justice Department investigation has pitted Google and Yahoo against not only their archrival Microsoft but also many of the advertisers that are their primary sources of revenue.

In a letter to Justice Department officials last month, the Association of National Advertisers warned that the Google/Yahoo partnership would leave advertisers with fewer options for placing online ads, raise the cost of online advertising and further cement Google's control over the search advertising market. The Association of National Advertisers represents such large companies as Kellogg Co., Johnson & Johnson, American Express Co., Walt Disney Co., Kraft Foods Inc. and McDonald's Corp.

For their part, Google and Yahoo argue that the deal will benefit both advertisers and consumers by delivering more targeted, more relevant ads.

They also maintain that because Google's system for identifying and displaying ads is more lucrative than Yahoo's approach, the deal will generate additional revenue for Yahoo that will it make it a more formidable competitor to both Google and Microsoft. When it first announced the deal, Yahoo projected the agreement would increase its operating cash flow by $250 million to $450 million in the first year.

The Justice Department review could play out in one of several ways for Google and Yahoo.

If the department does not make its intentions clear soon, the two companies could simply move ahead with their partnership and wait to see whether the government acts. While a court case would be unpleasant and cumbersome, there is no guarantee that a lawsuit would succeed -- leading some to speculate that the Justice Department may just be bluffing in threatening to sue.

If the department does bring a court challenge, Google and Yahoo could fight, or they could simply walk away from the deal.

Or, to play it safe, the companies could offer up voluntary conditions -- limiting the volume of ads subject to the agreement, for instance -- in order to head off a possible lawsuit.

Still, that approach risks exposing Google to accusations that the partnership would have in fact crossed the line into anticompetitive behavior. Many people in the industry are doubtful that the two sides can agree on concessions that would enable the deal to pass antitrust muster, still make the partnership worthwhile for Google and Yahoo and not taint the companies.

Melissa Maxman, head of the antitrust practice group at Baker & Hostetler LLP, said Justice Department attorneys must answer a series of critical questions in determining whether to intervene in a deal such as the Google/Yahoo partnership. Those include: How much market share does each party have? Would the agreement further concentrate the market? How would the deal affect consumers, competitors and other players, such as advertisers in this case?

The challenge, Maxman noted, is applying standard antitrust measures to a deal like this. For example, the department will often measure market share geographically, but Internet companies have a global reach. And precisely delineating "product" market share is hard to do in online advertising.

Microsoft, for one, argues that the deal should be blocked because Google already controls more than 70 percent of the market for search-related advertising. If it teams with Yahoo, which controls as much as 20 percent of the market, the two companies could together have a 90 percent share, Microsoft has warned.

The nature of the Internet advertising business also complicates things. Both Google and Yahoo use auctions to sell the ads that run alongside search results on their sites. The companies maintain that even if they partner, the marketplace will still determine online advertising prices through separate auctions.

The Association of National Advertisers is unconvinced. In its letter to the Justice Department, the group warned that the agreement will effectively drive up prices for ads sold through Yahoo's auctions since Yahoo will have access to ads sold by Google at a higher price.

Ultimately the battle over the Google/Yahoo partnership is about more than just the online advertising business. It's about the survival of Yahoo as an independent company, and whether Microsoft or Google has more of a say in the future of the Internet and computing.

That war extends far beyond Washington and the tug-of-war over Yahoo. But for now, the Justice Department could help shape the outcome.

More European banks may fail as government cash injections dry up and the region's economy grinds to a near-halt next year, the International Monetary Fund warned Tuesday.

The IMF said in its economic outlook for Europe that banks are still under severe pressure to reduce their high leverage -- the amount of debt they carry in proportion to their assets.

It said recapitalization was "now likely to slow" because cash-rich investors ---- such as sovereign wealth funds and institutional investors such as pension funds -- are now less interested in buying into banks. Instead, governments have decided to take equity stakes and become the provider of new capital.

The IMF said stock markets are watching leverage closely and that European banks tended to score less favorably than U.S. rivals.

This means that banks are now more reliant on government help, selling off assets and combining with rivals to shore up their capital, the IMF said.

A full-blown banking crisis in Europe is "improbable," the fund said, but it warned that trouble was far from over as borrowing costs and credit default spreads increase and credit becomes harder to get.

"Additional banks may fail, as implied by their very high risk spreads and market doubts about the viability of their business models," it said.

It called on European leaders to make "a decisive commitment to concerted and coordinated action to alleviate financial stresses" and avoid the serious risk of European banks retrenching to national markets, undoing efforts to join European economies more closely.

European Union governments have put up some 2 euros trillion ($2.6 trillion) in recent weeks in a bid to restore confidence in the troubled financial sector after banks froze lending to each other. The money includes guarantees that might not be spent, but also new capital injections in some countries such as Britain, France and Germany.

The countries have taken action individually on the basis of broad principles agreed to at an economic summit earlier this month.

The IMF predicts that the 15 nations that share the euro will barely grow next year, expanding just 0.2 percent. The largest economy in the region, Germany, will stagnate, it said.

Countries where a housing bubble is bursting will see sharper downturns, particularly Denmark, Ireland, Spain and Britain.

Business activity will be "very weak" in the second half of 2008 and the first half of next year, but should rebound in 2010, the IMF said.

Companies that are dependent on bank lending will be hit hard by the credit crunch, the report said, with default rates "expected to rise from their recent historically low levels." Highly leveraged firms and real-estate related businesses are particularly vulnerable, it said.

The IMF also warned that high oil prices -- at an average of $89 a barrel -- could slow growth over the longer term.

A Japanese auto giant Toyota Motor employee polishes the company's luxury sedan Century at the company's showroom in Tokyo. Toyota has slashed its 2009 global sales target due to slowing demand

After taking over as Toyota (TM) president in June 2005, Katsuaki Watanabe regularly warned of the dangers of complacency creeping in at the Japanese automaker (BusinessWeek, 3/5/07). But until recently, it was a tough message to get across. The company was doing too well: In the year through March 2008, Toyota sold 8.9 million vehicles, an increase of 32% over five years, while its net profits rose 53%, to $17 billion. This year it will likely overtake GM (GM) to become the world's largest carmaker.

These days, though, Watanabe need only point to Toyota's stock price to keep employees' feet on the ground. Since the beginning of the year, Toyota's shares have fallen 37%. While roughly in line with Japan's benchmark stock index, the performance isn't much better than troubled GM, whose stock is down 39%. And Toyota's recent sales, though not nearly as bad the Big Three's, hardly instill confidence. Through September, sales were down 10% in the U.S. and were sluggish in Europe. In Japan, where Toyota's market share is more than 40%, car sales will likely fall short of last year's figures, which was the company's worst in more than two decades. Even in China, where the automaker aims to increase sales 40% this year, the numbers aren't looking as promising as Toyota's top brass had hoped.

Some analysts are sounding the alarm. In an Oct. 10 note to investors, NikkoCitigroup auto analyst Noriyuki Matsushima predicted "a sudden and substantial earnings decline" for Toyota. "We believe Toyota needs to draft a new strategy that changes its existing course and includes initiatives to secure appropriate sales volumes," he wrote. Lowering his projections for the current fiscal year, Matsushima expects Toyota to post operating earnings of $11 billion, a 50% decline compared with the year that ended Mar. 31, and $5 billion less than the company's projection.

Cash Hoard Supports 0% Financing Offer

Time for investors to bail out? Not exactly. Even if Toyota's earnings drop by half this year, the company's operating profits are still likely to exceed $10 billion. And with a solid balance sheet, more than $20 billion in cash, and a slew of new car initiatives, Toyota is better placed than most automakers to weather economic uncertainty. "Once [Toyota executives] have made the decision to do something, they can get on and do it without having to arrange financing," says Andrew Phillips, an analyst at KBC Securities in Tokyo.

For now Toyota's problems seem minor compared with the Big Three's (BusinessWeek.com, 10/7/08)—and it's moving to keep it that way. Toyota's bulging coffers will help it most in the U.S. There, it's using the cash—$3 billion at its U.S. financing unit, as of the end of June—to plug falling sales. Facing an increasingly severe slowdown and growing inventory, Toyota on Oct. 3 began offering for one month interest-free financing on 11 models, including the Corolla, Camry, and Tundra full-size pickup. The risk, say critics, is that 0% financing could undermine car-resale values and hurt the brand if the company decides to extend the offer.

Toyota is also taking radical steps at its North American factories. After opening a plant for big Tundra pickup trucks in San Antonio in 2006, the company has since curtailed production. It also has suspended production at three U.S. plants for three months in August to retool them so there's more emphasis on smaller, fuel-efficient models.