Actually, strickly speaking its both. Its a potentiometer that controls the LCD screen's colour saturation by finely adjusting the voltage to it. Same as is on a GBA or GBC (On the GBC its under the battery clip like the NGPC).
Leaving it turned 'way up' could in theory shorten the life of the LCD, but having the contrast on your CRT-TV turned right up can do the same, and as I said above the more you turn it, the more the screen gets a washed out look, which looks shit, so you'd have to be mental to leave it like it anyway.
Which is why I said, if you're gonna mess with it, only a little, and put it back as it was (or very close to) They are adjusted by hand in the factory, a tiny amount either way wont do any harm, and could be considered a matter of taste. BUT ONLY A LITTLE, AND DONT FORCE THE SCREW! I advise no more than just under half a turn either way. Never put any pressure on it.