Summary: Testimony was given on two previous GAO reports which examined the changing goals and tools of Japan's industrial policy and discussed how Japanese macroeconomic and fiscal policies have contributed to achieving these goals. Until the early 1970's, Japan strongly supported government efforts to reconstruct the Japanese economy by rebuilding basic industries and working to catch up with Western technology. Toward these ends, Japan strictly controlled foreign exchange, encouraged exporting and restricted importing, and controlled foreign investment and technology acquisition. In addition, Japan kept interest rates low, controlled domestic capital markets, encouraged savings and investment, and channeled government-controlled resources into productive investments. By the mid-1970's, Japan gave more recognition to concerns such as the quality of life, the environment, and social issues. Today, Japan's industrial policy goals are to increase productivity, promote conservation, and ease the problems of declining industrial sectors. Increased budgetary deficits have placed constraints on the government's ability to finance industrial development. GAO also commented on the yen-dollar exchange rate, stating that: (1) many variables affect the exchange rates which periodically might have adverse trade and employment consequences for the United States and other countries; (2) it found no evidence to support charges that Japan manipulates or artificially depresses the value of the yen; (3) domestic economic policies and exchange rates have become more dependent on each other; and (4) although currency fluctuations have created problems, there is no consensus as to what changes in exchange rates would be desirable and no agreement on what constitutes a better foreign exchange system.