What a nice bike. JMO but if I owned something so tastefully put together I'd probably just use it as-is.

That said, it would also look hot with some white plastic fenders.

As much as I'm not against respacing frames, for whatever reason, and possibly because I have big-time Paramount lust I would leave this at 120mm, get a new Sunrace 5 speed freewheel or possibly look for a Suntour Ultra 6. If I was gonna do the wheels I'd totally look for period correct 700c clincher rims (or maybe even tubulars) and re-lace to the original hubs using double butted spokes.

Whatever you decide I'm sure it will work well. Its a sweet bike.