Japan Tobacco Inc. the world's No.3 tobacco maker, said it may raise the price of domestic cigarettes to account for high raw materials costs and help offset sluggish demand.

Japan Tobacco, which is half-owned by the Japanese government, has seen the domestic tobacco market shrink for nine straight years as the population ages and health consciousness spreads.

It is also grappling with the yen's surge against the dollar and fallout from a food scare earlier this year involving pesticide-contaminated dumplings it imported from China.

"First we want to try to reduce our costs, then we want to shift customers to higher-priced, value-added products," said spokesman Yukiko Seto.

"After that, we might consider that sort of thing (raising prices)," she added, confirming a Nikkei business daily story quoting Japan Tobacco President Hiroshi Kimura as saying price hikes were an option.

If the company raises cigarette prices, it will be the first time since 1993 that a price increase has not been linked to taxes. Japan Tobacco makes Mild Seven cigarettes and owns the Camel, Winston and Salem brands outside of the US.

Key among rising costs the company faces is that for leaf tobacco, some 60 per cent of which is imported. It is also taking a hit for more expensive materials due to a packaging change.