Backroom Talks, Secret Protocol Mark G7 Intervention

The Group of Seven nations have agreed to a secret protocol to guide their coordinated intervention and won’t reveal it in order to keep currency markets guessing, according to people familiar with the matter.

Fuse | Getty Images

The suggestion from these sources and the G7 statement is that the intervention could continue for a while and markets will have to guess at the exchange rate level for the Yen - or some other metric - that is the goal of the intervention by the world’s leading economies in the Yen.

The statement from the G7 specifically says that the intervention to weaken the Yen will take place Friday but goes on to suggest it could be more open-ended, reading, “We will monitor exchange markets closely and will cooperate as appropriate.”

The historic decision to conduct coordinated intervention came together as markets were closing on Thursday but was the product of almost 48 hours of intense talks between Europe, the US and Japan.

Discussions began Wednesday morning between G7 deputies and included a discussion between French Economics Minister Christine Lagarde, who had originally suggested the G7 teleconference call, and US Treasury Secretary Tim Geithner.

CNBC - Disaster in Japan - Japan Earthquake and Tsunami
CNBC - Disaster in Japan - Japan Earthquake and Tsunami

A series of meetings between US, Japanese and European deputies followed that day and evening. At 1:30 on Thursday, Geithner spoke with ECB President Jean Claude Trichet. Sources said Geithner was not pushing a specific plan but trying to coordinate global support for whatever Japan requested.

Over the same time, Fed Chair Ben Bernanke was speaking with Bank of Japan Governor Masaaki Shirakawa and Trichet. At around 3:30 p.m., President Obama was advised of three options on the table: verbal intervention, support for Japanese unilateral intervention and coordinated intervention. He was said to give his consent for Geithner to agree to whatever Japan requested, assuming it was within reason.

It’s unclear when the idea of coordinated intervention coalesced. At 4 p.m. Geithner spoke with Japanese Finance Minister Yoshihiko Noda, who then floated the idea of coordinated intervention. He suggested that markets’ knowledge of the G7 meeting had raised expectations for strong action. About 90 minutes later, US, Euro Area and Japanese officials hammered out a plan which was then agreed at the 6 p.m. G7 call.

The thinking of the US Treasury Secretary, people familiar with the matter said, was that Japan had a long list of very serious problems and that the yen should not be one of them. He believed that, when asked by Japan, the US and the world should act to remove volatility from the market so Japan could focus on the more critical life and death issues it faced.

He is said to see this as not precedent setting, but unique to the extraordinary disasters that have shaken the world's third largest economy and are still playing out.

The Obama administration could face some criticism for helping Japanese exporters. But Geithner believed that there are probably as many US companies hurt by the potential of lack of supply from Japan, making the effect on the US probably a wash.