By Makiko Yamazaki

TOKYO (Reuters) - Japan's Sony Corp <6758.T> said a strong yen and slower smartphone sales would weigh on its cash-generating image sensor business this year, but the popularity of its PlayStation 4 videogame should help it reach its profit target.

Damage from earthquakes forced the electronics giant to partially halt its image sensor production in April, but Sony said on Friday that the damage had been less than previously expected.

It reiterated confidence in the long-term prospects of the image sensor business, used in smartphone cameras and other appliances, and pledged to diversify clients to reduce its reliance on the stagnating smartphone market.

"We have not changed our view that image sensors would be a medium and long-term profit driver," Chief Financial Officer Kenichiro Yoshida told reporters at an earnings briefing.

Yoshida said Sony has been in talks with various automakers and auto parts makers for development projects. Even though the company is a latecomer to the automotive sensor market, those projects "are expected to generate substantial sales in 2019 or 2020," he said.

For the current year through March 2017, the image sensor business will be a drag, limiting Sony's overall operating profit to 300 billion yen ($2.9 billion), or a 2 percent rise.

Sony said operating profit fell 42 percent in April-June from a year earlier to 56.2 billion yen, as its chips division, which includes image sensors, swung to a loss of 43.5 billion yen.

The loss, however, was offset by strong demand for PlayStation 4 videogame software and cost cuts in its struggling smartphone business.

The gaming division, which Sony sees as its biggest growth driver in the medium term, reported profits of 44 billion yen, up from 19.5 billion yen a year ago.

IN SEARCH OF FUTURE DRIVER

Sony has reshaped itself to target expansion in lucrative areas such as videogames, entertainment and camera sensors, and not to pursue sales growth in areas such as smartphones where price competition with Asian rivals is acute.

In line with this strategy, Sony announced on Thursday it had agreed to sell most of its ailing battery business to Murata Manufacturing Co Ltd <6981.T>.

Sony is not alone in the Japanese electronics industry in reshuffling its businesses.

In a shift away from consumer electronics to industrial products for corporate customers, Panasonic Corp <6752.T> said on Friday it would raise up to $3.86 billion in corporate bonds, partly to finance its investment in a Tesla Motors Inc <TSLA.O> battery factory.

"In the near term, strategic investment (from the money raised) would be mostly in Tesla's Gigafactory," Panasonic's Senior Managing Director Hideaki Kawai told reporters after the company reported earnings. "There is a need to speed up investment," he said, citing strong demand for the electric car maker's upcoming Model 3 sedan.

(Reporting by Makiko Yamazaki; Editing by Christopher Cushing and Susan Fenton)