Daihatsu has said it will stop sales of new vehicles in Europe at the end of January 2013.
Daihatsu, a subsidiary of Toyota Motor Corp. said the strong yen has made exporting vehicles to Europe from Japan too unprofitable.
Daihatsu said that the increasing cost of developing vehicles that meet tighter CO2 emission regulations in Europe also played a part in the decision.
The automaker said it would continue to supply parts and after sales services in Europe after 2013.
European deliveries of Daihatsu cars fell from 11.9 percent of oversees sales in 2005 to just 5.3 percent in 2010. The carmaker said it sold 19,300 vehicles in 10 European countries in 2010, down from 36,300 units in 2009.
"Daihatsu came to the decision because it could not make a business out of exporting completed units produced in Japan," a company statement said.
The yen has appreciated sharply against the euro since late 2008 and especially since mid-2010. The euro currently fetches around 110 yen, near its lowest level in nine years, against around 135 yen in mid-2010 and 170 yen in 2008.
Exporting from Japan was not a viable business "when the costs to meet European regulations on CO2 emissions are growing and the profitability is deteriorating due to a stronger yen against euro," the company said.
In Japan, the automaker has forecast eight percent growth in net profit to 44 billion yen ($533 million).
Despite falling sales, Daihatsu passed BMW AG and Volkswagen's AG's Audi to win top honors in vehicle ownership satisfaction among German car owners, according to a J.D. Power and Associates study in 2009.
Daihatsu scored very high in service and ownership costs, Martin Volk, senior research manager at J.D. Power and Associates, told Automotive News Europe at the time.