Menuki

The menuki is a sword hilt decoration found on Japanese samurai swords. It is fitted to the handle (Tsuka) over the (usually) ray skin and under the handle bindings called 'Tsuka-Ito'.

This ornament hides one of the mekugi or holding pegs which are driven through the tsuka joining it to the tang of the blade. It also affords a little 'grip' as this protrudes slightly into the palm of the hand ad I find helps 'locate' the left hand. The left hand is important for cutting in iai.

Nice schema on wikipedia of Japanese sword:

http://en.wikipedia.org/wiki/File:Katana_(common_shema).png

An interesting article here about shortening the tsuka which also shows some construction of the handle.