* Q3 operating profit seen down 63 pct at 189.1 bln yen
* Toyota seen lifting Y380 bln FY operating profit f'cast
* Loss-making Japan operations, strong yen drag
* Toyota shares up 19 pct in last 3 months, US recovery eyed
By Chang-Ran Kim, Asia autos correspondent
TOKYO, Feb 8 (Reuters) - Toyota Motor Corp is expected to report a huge drop in quarterly profits on Tuesday hit by tanking Japanese car sales and a firm yen, highlighting its damaging exposure to the loss-making export business.
Domestic rivals Nissan Motor Co and Honda Motor Co are also seen suffering a drop in October-December profits, but the decline at Toyota is set to be the deepest given its heavier weighting in the shrinking Japanese market.
Toyota exported more than half of its Japan-made vehicles last year, making a loss on many of them with the dollar well below the minimum 90 yen that President Akio Toyoda has said was necessary to keep Japan's manufacturing sector competitive.
Analysts say Toyota's disproportionately big Japanese operations -- it has 17 assembly plants across the group -- will remain the biggest drag on its relative earnings power.
Toyota, which stayed ahead of General Motors Co as the world's biggest automaker by a thinner margin last year, built 43 percent of its vehicles in Japan last year, compared with 27-28 percent for Honda and Nissan.
A recovery in car demand in the United States, Toyota's biggest market, has driven a recent rally in its shares, but more analysts see the stock as a hold or sell than a buy, making them more bullish on Nissan and Honda.
Some say Toyota could further suffer from the lingering effects of last year's recall crisis, especially as consumers have more car models to choose from with the expansion of Volkswagen AG (VOWG_p.DE) and Hyundai Motor Co in the United States.
Wide-ranging estimates from nine analysts surveyed by Reuters put Toyota's October-December operating profit at an average 70.6 billion yen ($859.1 million), down 63 percent from 189.1 billion yen in the previous year.
Profits made in China are not counted on the operating level at Toyota, which reports under U.S. accounting rules.
That would bring the nine-month tally to 394 billion yen, above Toyota's full-year forecast of 380 billion yen, making an upward revision likely, analysts said. For the year to March 31, consensus forecasts expect an operating profit of 489 billion yen, according to a poll of 23 analysts by Thomson Reuters I/B/E/S.
Although Japan's car market is shrinking with the declining population and urbanisation, Toyota's founding family chief, Toyoda, has vowed to build a minimum 3 million vehicles a year at home to keep the tradition of manufacturing alive.
But a dollar rate of around 82 yen has made its domestic operations unprofitable, and Toyota has cut its parent-only operating earnings forecast twice in a row this business year, to a loss of 490 billion yen from the initial 340 billion yen.
Nissan, Japan's No.2 automaker, is set to report a smaller decline in third-quarter profits on Wednesday helped by industry-beating sales in the United States, China and Europe.
Last week, Honda reported a 29 percent fall in three-month operating profit, but beat analysts' estimate and lifted its outlook to above consensus forecasts.
Toyota's shares have risen 19 percent in the past three months, better than Tokyo's main TOPIX index , which grew 15 percent. Honda and Nissan gained 27 percent and 20 percent, respectively, in the same period. (Editing by Anshuman Daga) ($1 = 82.17 Yen)