Toyota started commercial production of passenger cars with the Toyoda Model AA in 1936. After replacing its 65 hp Type A engine with the enhanced 75 hp Type B in 1938, Toyota went on to design an improved passenger car based on the existing AA and AB models. As production of civilian-use passenger cars was banned in Japan at the time, the Model AC was designed to meet the needs of the Japanese army, and its production began in March 1943. The AC's external design differed from that of the AA in that the AC adopted the two-piece windshield, painted the radiator grille in the same color as the body, and eliminated the chrome trims.

For the power transmission mechanism, the AC adopted the Hotchkiss drive instead of the torque tube system. Although only 65 units had been produced before production of passenger cars was completely banned in Japan in February 1944, 50 more units were produced soon after WWII for use by foreign trade representatives, making the AC the first Japanese-made passenger car that was built after the war.