Yes, anything moving away would get smaller. Two ways I might implement it...
1. If the objects move away from the viewpoint slowly but still needs to actually animate, have multiple animations where each one is smaller than the last. You could also use scaling on the sprite to smooth over the transition between sizes if necessary. Then, create a set of collision groups to assign to the animations that will be used to determine how "far" the projectile is from the player. The target (or obstacles) would have a matching set of animations (for how close or far it is) and thus would only sense "collisions" once both the projectile and the object were both in a matching set of collision groups (which means they're at the same "distance").
2. If the projectiles move quickly, you can do it with a single animation (where the projectile diminishes in size frame by frame). You'd create the collision sensor for the projectile at the smallest point of the animation so it's always precisely on target. Then, if it senses a "collision" with a target (or obstacle), it compare's the current frame number to the object's "range" value - another number that would correspond to a similar distance.
In either case, the Y motion is separate. Most likely you'd want to check the distance (as shown in 1 or 2 above) and set the Y velocity appropriately. While it's still near the player, make it negative to move it up. As it gets farther away, successively reduce it to zero and then make it positive to have it start coming down again.
Looking at the game shown in your video, it seems there's really only one actual distance to the targets and hitting/not hitting is merely determined by the X/Y position of the target. Everything else is just cosmetic - making it look "pretty".
