By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japan's Prime Minister Fumio Kishida said on Tuesday the government will scrutinise the economic impact of any further declines in the yen, which risk hurting corporate profits.
The rare warning over the potential disadvantage of a weak yen by Kishida, who took over as prime minister last week, underscores growing concern among policymakers about the damage rising input costs could have on Japan's fragile recovery.
"If the yen weakens further, it will boost exports. On the other hand, it will lead to a rise in costs for companies through higher import costs," Kishida told parliament.
"We will closely watch the impact of currency moves on companies," he said, when asked by an opposition lawmaker on how the government would respond to excessive yen declines.
The government will help small and medium-size firms cope with the rise in costs through financial support and steps to boost their productivity, he said.
Policymakers have historically welcomed a weaker yen as it makes the export-reliant economy's goods more competitive abroad.
But the yen's drop to a near three-year low against the dollar, coupled with a spike in fuel prices, risk squeezing profits for firms already hit by factory disruptions and supply bottlenecks blamed on the COVID-19 crisis.
The Japanese currency sank as far as 113.495 per U.S. dollar on Tuesday, a level not seen since December 2018.
Japan's wholesale inflation hit a 13-year high in September with the yen-based import price index surging at a record pace, a sign the sliding yen was forcing firms to pay more for raw material imports.
Kishida said the government would consider expanding tax breaks for companies that boost wages by offering bigger corporate tax exemptions and targeting a wider pool of firms.
Such steps, along with a fresh stimulus package to cushion the blow from the pandemic, are among Kishida's campaign pledges ahead of a general election on Oct. 31.
Japan's economy recovered from last year's pandemic-induced doldrums on robust exports. But supply constraints and rising raw material costs cloud the outlook by hurting manufacturers, who have been key drivers of growth.