The Incredible Shrinking Car Market

From top: Mitsubishi Motors Corporation; Daihatsu Motor Co., ltd.

Tiny and cheap cars are the rage in Japan

You'd have to be living under a rock—or perhaps driving a Ford Pinto—to be unaware that Japanese auto manufacturers have conquered foreign markets. Toyota recently passed GM to become the world's largest carmaker, and even runner-up brands like Honda are in better shape than their struggling American counterparts. But back home, the news isn't so golden. Thanks to an aging, shrinking population and lackluster consumer spending, sales of full-size vehicles in Japan last year were the lowest since 1977. Mighty Toyota may have posted a record global profit of $18.6 billion for 2006, but its home-soil sales slumped...

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