Toyota plans to launch a new 1.5 million yen, or about $15,760 subcompact hybrid, according to a report in Japan’s Asahi newspaper.The car, expected in late 2011, which will be built on the Yaris platform.The Toyota subcompact hybrid will be produced in Japan, and in France for the European market, according to Asahi.

Toyota believes that dedicated hybrids, such as the Prius, sell better than hybrid versions of existing auto so it would be likely that it will get its own sheetmetal. In Japan, demand for hybrids is peaking. The all-new 2010 Honda Insight was the best-selling car in April, and the redesigned 2010 Toyota Prius was the best-selling car in May. To compete with the Insight, Toyota lowered the price of Prius in Japan and the in the US.

The focus on a smaller size and lower cost is an apparent attempt to compete against Honda’s upcoming small hybrids, the Honda Fit Hybrid and Honda CR-Z Hybrid, due out in 2010 and 2011 respectively. However, the 2010 Honda Insight—the smallest and least expensive hybrid currently available in the US market—has not sold well. Honda was targeting 100,000 Insight sales in the US in the first 12 months, but based on average monthly sales of 2,000 to 2,500 units, will miss the mark by a wide margin. However, the Honda Insight has been a hit in Japan

The introduction of subcompact hybrid models from Toyota and Honda will represent a change of direction from the past few years, when most new hybrids offerings have been SUVs. Hybrid SUVs can be 15 to 20 percent more fuel-efficient than their conventional counterparts, but mpg for those models has remained in the high teens or low 20s.

New subcompact hybrids could immediately rise to the top of fuel economy rankings—50 mpg or higher—while maintaining a price lower than any other current hybrid. Those small hybrids will also help carmakers meet new stricter fuel economy and carbon emission standards.