EVEN as Toyota faces the prospect of the first operating loss in its history, in the six months to December, motor industry analysts in Tokyo are predicting a recovery by Japan's largest carmaker in the next financial year. Toyota's share price seems to reflect their confidence. While the Nikkei Average has declined 13.3 per cent from 20,953 points between September 1 and November 18, Toyota's shares have risen 7.1 per cent from 1,690 yen (about HK$122), to 1,810 yen. On November 1, they were at a two-year high of 1,900 yen. By contrast, the shares of the other major car manufacturers have gone up slightly or not at all. ''I think the industry across the board is due for a bit of a bounce in terms of domestic demand during the second half of next year,'' said Kleinwort Benson's motor industry analyst in Tokyo, Stephen Usher. The reason for his bullishness is that the roughly four-year replacement cycle of new cars bought during the ''bubble economy'' of the late 1980s will coincide with a general improvement in the economy starting from spring next year, and an expected increase in personal consumption as a result of soon to be announced cuts in personal income tax. The revenue shortfall will eventually have to be made up by increasing consumption tax from the present level of three per cent, but the Government has decided to hold that over for at least a year so the tax cuts can stimulate the economy. Mr Usher's counterpart at BZW, Andrew Blair-Smith, agrees. He said the prospect of the consumption tax increase would also eventually be an incentive to ''help to front-load demand for autos to some extent''. ''We've been looking for the vehicle market in volume terms to grow about six per cent next fiscal year to March 1995, after falling to 6.5 per cent this year to March 1994,'' he said. This year should already have seen a strong pick-up in domestic demand because of the replacement cycle, but in the light of the overall economy, demand has been at its weakest for many years. But Mr Usher believes that the delay in replacement purchases is all the more reason to expect a recovery next year, as people decide they cannot afford to wait any longer. Depreciation on cars in Japan is swift and steep. All the carmakers stand to benefit, but because of its size and relative strength, Toyota will increase the gap between it and the other four major companies - Nissan, Honda, Mazda and Mitsubishi. ''From an investment standpoint, it will be Toyota, simply because of its commanding market share, compounded by its very large dependence on the domestic market,'' Mr Usher said. Toyota derives 58 per cent of its consolidated revenues from the Japanese market, leaving it much less vulnerable to the decline in exports caused by the yen's 14 per cent appreciation against the US dollar this year, and even more against European currencies since the collapse of the Exchange Rate Mechanism. In addition, Toyota is due to bring out new versions of several models including the Starlet, Tercel, Corsa and Corolla. Mr Blair-Smith said Toyota's economies of scale meant it was better placed than its rivals to benefit. Toyota produces 140 vehicles per assembly worker, compared with the industry average of 90 vehicles, and its inventory control is much better. It has a stock turnover (cost of goods sold divided by inventory on hand) of 23 times compared with an industry average of about 10 times. ''In an anaemic recovery, Toyota will continue to improve its relative strength,'' said Mr Blair-Smith. ''The other thing is the longer the recession continues, the better placed Toyota looks - relative to the rest of the industry - because it still has its cash mountain, which it is able to call on to finance continued spending on product development in aperiod where other makers are having to cut back.'' Although Toyota's share price is now trading at a 10-year high relative to its forecast earnings, Mr Blair-Smith is unconcerned. ''The American carmakers managed to have very strong share price rallies way ahead of turning back into profit, even when they did turn into profit, it was not that large. The same thing could happen in Japan, so I'm quite happy to be slightly overweightin this sector,'' he said.