As far as honing, you can easily go .010 over with a hone, but not a DEGLAZER,
if you want a little more snap of the throttle, you can mill the head .040 MAX
and receive a gain from grunt to 3600 but then you run into flow restriction.
But why? it is a 7 hp play toy, you are not trying to compete in an event where power is necessary.
The piston having a larger bore, will increase the Cr ratio a tiny bit anyway.

A new piston/rings and valves touched up, and if the crank needs attention, that taken care of, you will be very happy with your "new" engine.
If you want to get carried away with modifications, not a problem, it is your $$ and engine.
Good luck what ever you decide:beerchug:

I overhauled my K-161 for my "O" 2 years ago. I used the larger standard piston and had it bored to fit along with new valves. I'm really impressed with the torque this engine has when I spread gravel with my grader box on my driveway. I put it in 3rd gear and run the engine around 25% of full speed. The engine just putt putts along and when it needs more power the governor kicks in and it keeps going.

Moral of the story.......Plenty of power!