UPDATE 1-INTERVIEW-Honda aims to lower Japan cost structure

* Aims to be profitable in Japan at 70 pct utilisation - CFO

* Fit subcompact production in N.America doesn't make sense

* To reduce number of Japan-only models for efficiency

* U.S. used car prices stable

TOKYO, Nov 4 - Honda Motor Co aims to improve its cost structure to be able to break even in Japan using just 70 percent of its capacity to build cars, a top official at Japan's second-biggest automaker said on Wednesday.

Honda last week nearly tripled its annual operating profit forecast to 190 billion yen ($2.1 billion), far above consensus projections and despite lowering its dollar rate assumption to a tougher 85 yen for the second half from 90 yen.

Its Japanese operations are expected to stay in the red, but Chief Financial Officer Yoichi Hojo said Honda was shaving costs on internally developed components and looking for cheaper sources of parts around the world with the aim of erasing the losses even at the current depressed level of production.

"We can't get there right away, but the final step is to become profitable at the current level of production in Japan," Hojo told Reuters in an interview, adding that the company hoped to get there in two to three years.

For the financial year to March, Honda plans to produce 910,000 cars in Japan, or 70 percent of its domestic capacity of 1.3 million units. Honda decreased exports from Japan by 64 percent in April-September from the year before as the dollar fell 10 percent against the yen.

While Hojo noted that today's dollar rate of 90 yen made exports from Japan uncompetitive, he indicated Honda was unlikely to transfer production of the Fit subcompact to North America any time soon, as reported by some media.

"We certainly have capacity left over in the United States. But there's a good reason we're producing the Fit in Japan and not there," he said.

Hojo noted that with annual sales of less than 100,000 units in the United States, the Fit could be built more competitively in Japan, where the hatchback is Honda's best-selling model and expertise in manufacturing small cars is high.

Other cost-cutting steps include cutting the number of car models sold only in Japan, where Honda has more than 20 models across total annual sales of less than 700,000 units, Hojo said.

U.S. STABILISING

Honda's annual profit forecast revision also got a big boost from finance-related gains in the United States as used car prices recovered, reducing the need to set aside reserves from a fall in the residual value of its vehicles.

While some auto executives have expressed fears that carmakers may have to offer profit-eroding discounts to consumers after the end of government-backed incentives, Hojo said he expected used car prices in the United States to remain stable.

"Prices have recovered to levels before the collapse of Lehman," Hojo said. "We've been able to control our incentives."

One source of disappointment has been the new Insight hybrid model, which has so far sold just 15,000 units in the United States since going on sale this spring. Honda had originally targeted annual sales of about 100,000 Insights a year in its single-biggest market.

"Gasoline prices didn't rise as much as we anticipated. We haven't given up on our global sales target of 200,000 units annually, but getting to that volume is not the ultimate goal."