It may be "illogical," but Toyota CEO Akio Toyoda won't give up on building cars like Prius in Japan.

As his nation struggles to rebuild after the devastating earthquake and tsunami of March 11, Toyota Motor Co. CEO Akio Toyoda says he won’t contribute to Japan‘s problems by shifting more automotive production offshore – even as it contributes billions of yen in losses to the world’s largest automaker.

There had been mounting fears in the troubled Asian nation – but hope among many investors – that the Toyota family heir would use the crisis to justify a shift away from the home market reliance that has made it difficult to resume production after the disaster.  Japan’s largest automaker, Toyota has traditionally positioned its hefty Japanese production base as a matter of civic responsibility, though in the weeks after March 11, Toyoda admitted it was becoming increasingly “illogical.”

Toyota controls roughly half of the home market, but its production base there is far more than what’s needed simply to supply Japanese vehicle needs.  Competitors like Nissan have steadily fled offshore – Nissan CEO Carlos Ghosn closing four Japanese plants since taking over that company’s reins in 1999.  But while most of Toyota’s growth has been fueled by new plants in places like North America, Europe and China, the maker has been reluctant to walk away from its original production base.

“Toyota is a company that was born and raised in Japan and we can’t just abandon it because the environment is difficult,” said the grandson of the company founder, insisting the automaker would “grit our teeth and protect Japanese manufacturing.”

This year, Toyota plans to produce 3 million vehicles in Japan, or 40% of its worldwide output – with 60% of those vehicles earmarked for markets abroad.

That’s despite a variety of factors eating away at its bottom line, Toyota running up home market losses of 362 billion yen last year, the maker announced.  The March quake clearly hurt, initially costing Toyota hundreds of thousands of units of lost production – though it hopes to make up much of that during the second half of the fiscal year, as capacity comes back on line.

But even with Japanese plants up-and-running, it is facing lopsided exchange rates that ran up losses three times larger than the quake-fueled deficit during the final quarter of the last fiscal year, which concluded March 31.

Complicating matters, the Japanese giant is facing an unusual overcapacity situation in the home market.  Failing to close a single one of the assembly lines, it has as much as 1 million units of excess capacity in Japan – the sort of crisis that has long been more typically associated with Detroit competitors such as General Motors.

“If you look at it logically, it doesn’t make sense,” acknowledged the executive, who has been hunting for a solution that keeps the home production base in place.

In March, ironically, just days before the disaster, Toyoda announced a new global strategy to improve Toyota’s faltering finances.  This week, he revealed additional steps that include the consolidation of a number of its subsidiaries, including Toyota Auto Body and Kanto Auto Works.

Whether the consolidation will permit a reduction in excess capacity remains to be seen, though published reports from Japan speculate that is a factor.

Since assuming control of Toyota, CEO Toyoda has come under steadily increase pressure to turn around a company that was once seen as invincible.  The maker has seen sharp declines in profitability, in recent years, with first-quarter earnings for the new fiscal year down 77% and the rest of FY2011 projected by Toyota to see an overall 35% drop.

The maker has been struggling to reverse the damage done by an extended safety scandal that saw it recall a record number of vehicles in 2010 – though recent data, including the latest J.D. Power and Associates Initial Quality Study, back its contention of a reliability rebound.

But as a result of the March disaster, Toyota is expected to slip in the global sales race, this year, behind General Motors, and very probably to third place, analysts forecast, beneath Volkswagen.

CEO Toyoda has continued to sound an upbeat forecast for the future, laying plans to push sales up to 10 million and beyond, in large part by tapping new emerging markets.  But it is actually struggling in some of them, notably China, where it lags well behind GM, VW and even Nissan.

The latter manufacturer produces only about 25% of its total volume in Japan, and could trim that further as CEO Ghosn moves forward with the Power 88 plan, announced this month.  Its twin goals: boost worldwide sales to 8 million and generate returns of 8% on that ambitious volume.

Significantly, Nissan has been much faster to get its global production network back into operation after the March quake and tsunami, underscoring the continued risk of building cars – never mind buying parts – in Japan.

The comparison is unlikely to be lost on Toyota or Toyoda, but for the moment, the huge maker will continue to grit its teeth – and ask investors to do the same thing.