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* Strong yen prompts Toyota to cut full-year profit outlook
* U.S.-China trade war, stronger yen could weigh on exports
* USD/JPY fall below Y105 may spell more pain for exporters
TOKYO, Aug 9 (Reuters) - Japan Inc is caught in the crossfire of the trade war between the United States and China, as a resurgent yen threatens to sap profits and complicate the economic outlook.
Worsening trade friction between the world's two largest economies has reduced investor appetite for risk and boosted assets perceived to be safer bets, such as gold and the yen.
Japan's currency is now near its firmest level in eight months against the U.S. dollar, and exporters in the world's third-largest economy are preparing for pain.
Toyota Motor Corp reported its best quarter in four years last week, but cut its full-year outlook on the yen.
"We're going to be affected by a stronger yen this year, so to offset this as much as possible we have been taking extra measures to reduce fixed costs and cut down on expenses," Kenta Kon, a Toyota manager, told a briefing last week.
Japanese exporters regularly hedge against currency fluctuations, but a strengthening yen still hurts them because it makes their electronic appliances, semiconductors and cars more expensive overseas. It also decreases the value of overseas earnings when they are brought home.
The economy expanded at an annualized 1.8% in the second quarter, data showed on Friday, beating expectations of a 0.4% increase. Robust household consumption and business investment offset the hit to exports, which fell 0.1%.
But the outlook for exports could be further complicated as firms are saddled with a strengthening yen.
"The escalating U.S.-China trade war and the yen's rise are negative factors for Japan's economy," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"There's a pretty good chance the timing of a pick-up in exports could be delayed," he added.
Toyota expects the stronger yen to knock 350 billion yen ($3.3 billion) from its operating profit in the current financial year, roughly double its previous forecast and a big increase from last year's 50 billion yen impact.
The automaker, Japan's largest company by revenue and market value, expects the yen to average around 106 to the U.S. dollar in the current financial year, against a previous assumption of 110 yen.
'NO MAGIC SOLUTION'
Other exporters have signaled the possibility of currency pain. Sony Corp now expects the yen to average 108 yen this year, from its previous forecast of 110.
"There's no magic solution," Toshiba Corp Chief Financial Officer Masayoshi Hirata told reporters this week, referring to the yen. "If the yen continues to appreciate we'll have to further improve our cost efficiencies," he said.
Honda Motor Co, Suzuki Motor Corp and Mazda Motor Corp have also flagged the possibility of a cut to profit forecasts if the yen's climb continues.
Honda, which relies on the United States for about a quarter of its vehicle sales, last week posted a 16% percent drop in first-quarter profit, partially hit by the yen.
The currency is an additional problem for automakers already facing easing demand in many markets, said Chris Richter, senior research analyst at brokerage CLSA.
"Many Japanese automakers are going to have to adjust their profit forecasts simply because things are bad for them in vehicle markets, and the forex issue is the icing on the cake," he said.
The yen appreciating beyond 105 to the dollar is often seen by automakers as determining whether the currency will mean a significant hit to profit.
The currency was at 105.93 to the dollar on Friday.
"Given the current uncertainty about what will happen between the United States and China, along with other issues, it's difficult to revise our forecasts at the moment," Suzuki managing officer Masahiko Nagao told a briefing this week.
"But we may have to revisit them later in the year, once we have a better idea," he added.
Some investors and economists worry that the U.S.-China trade war has entered a new phase that will do even more damage to the global economy. U.S. President Donald Trump has said he will impose more tariffs on Chinese imports from Sept. 1.
China this week let the yuan slide to an 11-year low, prompting the U.S. Treasury Department to label Beijing a currency manipulator. The trade war has brought forward the next U.S. recession, according to a majority of economists polled by Reuters.
So far, economists say there are no signs that the uncertainty over the trade war has prompted Japanese firms to rein in investment spending.
Still, with global demand cooling, a resurgent yen is hardly what Japan's exporters - or the economy - need.
"The outlook for Japan's economy is highly uncertain. My main scenario is that Japan can avert a full-blown economic downturn," said Dai-ichi Life's Shinke.
"But the risk is clearly tilted to the downside," he said. ($1 = 105.9100 yen)
(Reporting by Naomi Tajitsu; additional reporting by Leika Kihara; Editing by David Dolan and Darren Schuettler)