Honda (NYSE: HMC - News) defied a sinking US car market and unfavourable exchange rates to announce an 8 per cent rise in quarterly profit on Friday.

However, the Japanese carmaker warned that business conditions were likely to worsen in the months ahead.

Honda's line-up of small, fuel-efficient cars has insulated it from the worst effects of the slowdown in the US, where it makes about half its non-motorcycle sales.

Some of its models, notably the diminutive Fit and Civic, have become such popular choices for downsizing drivers that the company is struggling to meet demand.

Honda's Y180bn ($1.7bn) net profit for the fiscal first quarter exceeded analysts' expectations and set a company record for the period.

It also stood out against crippling problems elsewhere in the industry.

On Thursday, Ford announced a record quarterly loss of $8.7bn as it announced a dramatic overhaul of its operations that would re-focus on smaller cars.

Koichi Kondo, Honda executive vice-president, cautioned that its strong quarterly results obscured "very harsh overall conditions" as prices for steel and other raw materials continue to rise and a weak US resale market erodes the value of the company's leasing fleet.

Honda stood by its gloomy prediction of an 18 per cent decline in net profit for the full year to next March.

It trimmed its operating profit forecast by 3 per cent and cut its global and US sales projections by 1.4 per cent each, to 4.08m vehicles and 1.745m vehicles, respectively.

Koji Endo, analyst at Credit Suisse, said: "It was a good quarter but I think investors are going to be disappointed by how they see the full year."

Honda, the largest Japanese carmaker after Toyota, has countered rising material costs with a combination of price rises and efficiency improvements.

With some dealers charging a premium for sought-after models, it has cut back sales incentives.

Honda is not immune from problems in the US, however.

Sales there fell 5 per cent by volume in the three months to June, although that compared with declines of 17 per cent at Ford and 20 per cent at General Motors. Sales in western Europe also fell, although emerging markets such as China and Brazil produced double-digit gains.

Honda said the yen's sharp rise compared with early 2007 - it hit a 12-year high against the dollar in March - reduced the value of its overseas sales and turned what would have been a 7.1 per cent first-quarter revenue increase into a 2.2 per cent fall.

The yen has retreated about 12 per cent from its peak, however, and at about Y107 to the dollar is trading Y6 below Honda's revised currency assumption, a situation that could help Honda beat its forecasts if it persists.