By Leika Kihara

TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said on Wednesday the central bank may take monetary policy action if yen moves have a big impact on inflation, escalating his warning against the economic fallout from the currency's recent sharp declines.

A weak yen affects the economy in various ways including by pushing up import costs, and affecting demand for goods and services, Ueda said.

While the BOJ won't seek to directly control yen moves with monetary policy, it will scrutinise the potentially huge impact they could have on the economy and prices, Ueda said.

"Companies' wage- and price-setting behaviour is becoming somewhat more active. As such, we need to be mindful of the risk that the impact of currency volatility on inflation is becoming bigger than in the past," Ueda said.

"Exchange-rate moves could have a big impact on the economy and prices, so there's a chance we may need to respond with monetary policy," Ueda told parliament.

The remarks compared with those Ueda made after the BOJ's policy meeting last month, when he said the yen's recent falls did not have an immediate impact on trend inflation.

Ueda's post-meeting comments have been cited by some traders as having accelerated the yen's declines by heightening market expectations the BOJ will hold off on raising interest rates from current levels around zero for some time.

(Reporting by Leika Kihara; Editing by Sonali Paul and Sam Holmes)