* Not cutting euro weightings from current level of 26 pct
* To keep underweight position on U.S. dollar-based bonds
* To stay overweight on Australia, Canada, Norway, Sweden
* Weighting for Aussie at record high of 13.6 pct. (Adds comment, details)
By Chikafumi Hodo and Michiko Iwasaki
TOKYO, Oct 14 (Reuters) - Japan's Kokusai Asset Management, the operator of the world's second biggest bond fund, is not planning to cut weightings for the euro in its $40 billion fund as the euro zone's economic prospects improve, Kokusai's senior fund manager said on Thursday.
Kokusai Assets's Global Sovereign Open fund, which invests in government bonds with high credit ratings, reduced weightings for the euro to as low as around 24 percent in June from a high of 42-43 percent late last year due to the region's debt crisis. Its exposure stood at 26.3 percent on Oct. 7.
Kokusai Asset will keep its underweight position on U.S. dollar-denominated debt for a while due to growing expectations of aggressive credit easing by the Federal Reserve in the near term.
Kokusai is thinking of maintaining its overweight positions on the Australian dollar, the Canadian dollar, the Swedish crown and the Norwegian crown on views that these countries have strong economic fundamentals and healthy banking systems.
"We are not thinking of reducing weightings for the euro from current levels as we believe it's not wise to cut them now," Masataka Horii, senior portfolio manager at Kokusai Asset, told Reuters in an interview.
"The market has already largely taken into account negative factors in Europe and it is starting to see positive developments in the region's economies, resulting in a lift in the European currency."
Kokusai Asset is not thinking about boosting weightings to 40 or 50 percent in the near term, however, as the fund manager does not believe Europe's problems have been fully resolved, with structural problems still lingering in countries like Greece.
"We still aren't sure when the Greek economy will pick up or when the problem of banking system and real estate in Ireland will end," Horii said.
The bond fund holds 3.26 trillion yen ($40.35 billion), making it the world's second-largest after the PIMCO Total Return Fund in the United States.
STAYING UNDERWEIGHT ON U.S.
Kokusai Asset will stay underweight on U.S. dollar-denominated bonds as the Fed is expected to take further quantitative easing measures at its next policy-setting meeting scheduled for early November.
Fed minutes released earlier in the week outlined that in September policymakers felt further monetary easing could be appropriate before long, and that among possible approaches the focus was on buying Treasuries..
"We've lowered the weighting for the dollar to around 23-24 percent from a recent peak of 28-29 percent. By doing so, we have been able to raise our overall performance," Horii said.
The Global Sovereign Open fund managed to beat its benchmark over the last three months, raising a return of 4.1 percent against 2.2 percent from Citigroup's World Government Bond Index (WGBI).
Yet it has underperformed in the last year, losing 2.6 percent against the benchmark's minus 1.6 percent.
Kokusai has increased its exposure to the Australia dollar to a record high level of 13.6 percent as the country has lifted its interest rates, but the asset manager is not planning to further boost its weighting on the Aussie, Horii said.
"There is always the possibility of raising weightings for the Aussie further, but looking at the balance in our portfolio, we've already raised it to a good level," he said.
Global Sovereign Open, widely known as "GloSov" among retail investors, has ranked No. 1 in asset size in Japan for about nine years and has been seen as a symbol of how Japanese investor appetite for higher-yielding foreign assets has grown in the past few years.
But the fund has seen net outflows every month since October 2008 after the bankruptcy of Lehman Brothers.
Its asset value has dropped more than 40 percent after peaking at around 5.8 trillion yen in August 2008. (Reporting by Chikafumi Hodo; Editing by Joseph Radford)