Japan's money market is only just starting to see funds flow more fluidly among banks after the Bank of Japan raised rates last month, but in a sign that conditions are improving the overnight call rate is seen likely to stay under downward pressure for the next two weeks.
Traders say major factors include the absence of several foreign banks that pushed up call rates in the past due to strong yen funding needs, as well as banks meeting their requirement for current account deposits at the BoJ ahead of schedule.
A recent fall in the cost of yen funding in currency swaps has reduced demand by foreign banks to tap yen funds in the call money market, helping to ease money market rates, traders said.
Banks which must set aside funds at the BoJ have steadily piled up reserves to meet a monthly legal requirement, some of them at a faster pace than others.
That would allow them to shed surplus funds they park at the BoJ, a sign that some of them are starting to lend in the overnight call money market to pocket around 0.25 percent on their interbank loans.
"Slowly but surely, market players are coming to terms with the era of positive interest rates and regaining a more normal market sense," said Kiyoshi Iida, a senior market economist at Totan Research.
Since the start of the current reserves maintenance period, which ends on August . 15, extra funds held by banks have mostly hovered below 1.0 trillion yen ($8.69 billion) in total, compared with 1-2 trillion yen in the previous period.
Banks are required to set aside a minimum of 4.7 trillion yen in total for the current period.
The BoJ's market operations this week also underscored market stability, just three weeks after the BoJ raised rates for the first time in six years on July 14, boosting the key unsecured overnight call rate to 0.25 percent from near zero.
The weighted average of the call money rate stayed slightly below the BoJ's target of 0.25 percent for most of this week despite the central bank draining funds from the market in same-day settlements for three consecutive days this week.
The call rate average was 0.234 percent on Thursday and 0.216 percent on Wednesday. It edged up to 0.255 percent on Friday.
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