Households, firms and financial institutions will keep estimated funds of 63.39 trillion yen on hand during the yearend holiday period, down 3.1 percent from a year earlier for the first fall in eight years.
The Bank of Japan largely attributed the decline to the record-high level of cash people held a year earlier to prepare for possible Y2K computer problems.
The cash on hand this year represents 11.43 billion notes, down 1.4 percent from a year earlier.
The BOJ also said it has issued 280 billion yen worth of 2,000 yen notes, fewer than anticipated when the bills began circulating in July.
The late Prime Minister Keizo Obuchi proposed creating the 2,000 yen bill to commemorate the year 2000 and the Group of Eight Summit in Okinawa this year, before he suffered a stroke and died in May.
But the bills are not being used as widely as expected, partly due to delays in resetting vending machines and automated ticket machines to accept the bills.