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TOKYO -- Honda Motor Co.'s emphasis on small, fuel-efficient vehicles helped push its net profit up 16% in the fiscal first quarter and led the car maker to lift its full-year forecasts, even amid soaring raw-material costs and expenses related to new production facilities.

The car maker said it couldn't keep up with demand in North America, where high gasoline prices are drawing consumers to such fuel-efficient models as the CR-V crossover and the Civic.

Honda's world-wide sales rose 5.6% to 946,000 vehicles from the same period last year. In North America, Honda sold 465,000 vehicles, up 2%.

Honda said its brisk sales and the positive effects of the weak yen, which helps Japanese auto makers by increasing the value of overseas earnings when converted into Japanese currency, led to its net profit of 166.1 billion yen ($1.38 billion) in the three months ended June 30, up from 143.4 billion yen in the same period last year. The company raised its net-profit forecast for the year ending March 31 to 625 billion yen, a 5.5% increase from the year earlier. It had previously predicted a 2.9% drop.

Honda's estimates were based on a conservative exchange rate of 115 yen to the dollar. So far this fiscal year, the dollar has remained at about 120 yen, causing the car maker to recalculate its earnings.

Honda, which last year surpassed Nissan Motor Co. as Japan's No. 2 car maker by sales volume after Toyota Motor Corp., has been benefiting from the thirst for smaller cars. Last week, Chief Executive Takeo Fukui said Honda will increase its capacity world-wide to meet demand. A new U.S. car plant will open next year with an annual capacity to produce as many as 200,000 vehicles. Honda expects annual production in North America to reach 1.62 million vehicles by the fall of 2008, up from 1.4 million cars this year.

Costs related to the new plant, discounts on older models and higher prices on raw materials such as aluminum in the U.S. led Honda to report a 15% drop in operating profit in North America to 97 billion yen, despite a 7.9% increase in revenue in the region.

Honda's earnings stand in contrast to the sliding profits reported by Nissan and the struggles of Detroit's Big Three, which have been late to catch on to the small-car craze. Toyota will report its first-quarter results next week.

Honda said its operating profit overall rose 8.9% to 221.6 billion yen. Revenue for the quarter rose 13% to 2.931 trillion yen.

One weak spot for the company is Japan, where demand for Honda cars dropped 13% to 136,000 units. Overall demand for cars in Japan has been weak because of an aging population.

Honda reports its earnings based on U.S. accounting standards.

Write to Amy Chozick at amy.chozick@wsj.com

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