* 1st new Toyota group factory in Japan in 18 years
* New plant uses manufacturing innovations to cut costs
* Toyota aims to innovate in Japan, employ in overseas plants
By Chang-Ran Kim, Asia autos correspondent
OHIRA VILLAGE, Japan, Feb 16 (Reuters) - Toyota Motor (7203.T) inaugurated its first new factory in Japan in nearly two decades on Wednesday, betting that advanced, low-cost Japanese production techniques can prevail even as a strong yen drives many manufacturers abroad.
The 120,000 unit-a-year plant at its subsidiary Central Motor will add to a growing production base for Toyota in northeastern Japan, just as the world's biggest automaker is losing money on many export-bound cars with the yen JPY= trading not far above 80 to the dollar -- a stone's throw from a record high set more than 15 years ago.
But with hundreds of thousands of domestic jobs depending on Toyota, which already produces a far higher percentage of its cars in Japan than domestic rivals Nissan Motor (7201.T) and Honda Motor (7267.T), President Akio Toyoda has promised to try to build at least 3 million cars a year in Japan.
"You read in the newspapers these days that with the strong yen, it's difficult to make cars in Japan and export them," Toyota Chairman Fujio Cho said in remarks to guests and company officials at the plant's opening ceremony on Wednesday.
"But if you go back to our roots, Toyota was founded in the hope that we could contribute to Japan and its industrial progress. We shouldn't be short-sighted in our actions," said Cho, who is among the few remaining proteges of the late Taichi Ohno, known as the father of the Toyota Production System.
Graphic on Toyota output: link.reuters.com/fap97r
Toyota earnings story: [ID:nL3E7D804S]
StarMine comparative data: link.reuters.com/qen87r
The Miyagi factory, 260 km (160 miles) north of Tokyo facing a snow-capped mountain range, began producing the Yaris compact car for export last month, replacing Central Motor's ageing facility near Tokyo. It plans to add two other compact models from April.
On a tightly controlled tour of the facility -- reporters were not allowed to photograph or sketch the latest innovations -- officials demonstrated how the factory had saved 50 percent in outlays on the building by doing away with the overhead conveyor belt that had required a more solid structure.
By positioning the cars' frames on a platform instead, the factory could also have a lower ceiling, saving 40 percent in energy costs for air-conditioning.
In perhaps the most eye-catching innovation, Central Motor designed the chassis line to position the cars sideways, hoisted on two poles, instead of parallel to the line. That way, officials said, work could be done simultaneously at the front and back of the car to mount engines and other drivetrain parts, boosting productivity and shortening the line by 35 percent.
"We've already employed some of the innovations in our new factories, such as India, and plan to spread them across many more," Atsushi Niimi, executive vice president in charge of manufacturing at Toyota, told a news conference after the launch event.
Niimi said in December that such innovations could reduce Toyota's capital spending by about 40 percent, limiting annual expenditure to about 700 billion yen ($8.36 billion) for the next five years or so -- about half of peak levels. [ID:nTOE6BN054]
"The level of manufacturing in Japan, including for materials, is very high and we can be even more competitive," he said.
Still, with rival Nissan moving production of its competing hatchback, the March/Micra, out of Japan to import from Thailand, Toyota will feel the pain at home as long as the dollar stays far below 90 yen.
Toyota's domestic operations are deep in the red -- to the tune of $5 billion this year -- and analysts said there was little hope of the losses reversing unless the dollar appreciates significantly.
"There are only three ways for Toyota to reverse its losses in its domestic operations: for the dollar to rise to 95 yen, by restructuring, or by getting its main suppliers to share some of their profits," Goldman Sachs auto analyst Kota Yuzawa said.
"But I completely discount the possibility that Toyota will close a factory in Japan or slash jobs, and I think most investors are also aware of that."
Yuzawa added that a weaker yen, in turn, would render the large Japanese production base a positive for Toyota.
While Toyota's greater exposure to Japan remains a drag, its shares have risen 12 percent since the company lifted its annual profit outlook last Tuesday.
Investors were encouraged by management's more optimistic sales outlook and anticipate lower quality-related costs, after the U.S. government found nothing wrong with Toyota's electronics in connection with massive vehicle recalls last year for unintended acceleration.
"It boils down to the argument of whether this level of yen strength will last," said Masataka Kunugimoto, auto analyst at Nomura Securities.
"If you take this moment in time, of course it's cheaper to build cars overseas than to build them in Japan and export them. But once a factory is built they last 30 to 40 years, and whatever manufacturing improvements you make in Japan can be adopted overseas," he said. ($1=83.76 Yen) (Editing by Edmund Klamann)