Iwakuro was recalled to Japan shortly after the February 26 Incident of 1936, and was a member of the court martial of the perpetrators. He was then assigned to Army Intelligence, where he oversaw the wiretapping of foreign embassies, interception of mail and correspondence and the production of counterfeit money for use in future operations. In 1937, he was transferred to the newly created 8th Section of the Imperial Japanese Army General Staff, and was tasked with planning the independence of Wang Jingwei's Nanjing Nationalist Chinese government. In 1938, he was on the committee which established the Nakano School, Japan's training school for intelligence and counter-intelligence agents.