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When discussing nuclear weapons programs, the “Japan Option” refers to a country putting its nuclear weapons program in a holding pattern. For example, Japan has the equipment and expertise to develop a nuclear weapon within eighteen months, but has never tested such a weapon. Former Deputy Assistant Secretary of the Treasury for International Affairs, Mark Medish published an op-ed in the New York Times today in which he suggests the “Japan Option” as a viable end-game solution for talks with Iran.
This is not to suggest that Iran is currently pursuing nuclear weapons, since the findings of the 2007 NIE have yet to be overturned. It is, however, an acknowledgment of the realpolitik fact that at least some segments of the Iranian government would certainly like to possess a nuclear weapon. The benefit of the “Japan Option” would be that those groups in Iran that desire a nuclear weapon will be provided the security of knowing that such a weapon is easily within their grasp. At the same time, Iran’s Arab neighbors, the United States, Israel and Europe will be provided with “inspections, surveillance and early warning.” 
As Medish points out, the big sticking point to achieving the negotiated settlement along the lines of the “Japan Option” is that,

To achieve such a framework would require at least minimal trust between Iran and the West, and also Russia, Israel and the Arab states. A good context would be engaging Iran across a wider frontier of regional security issues.
The trouble is that trust is awfully low between the United States and Iran. Who will move first?
Due to serious domestic fissures, the Iranians may not have the confidence to move in this direction. In a sense, no Iranian leader wants to be a Gorbachev, presiding over regime collapse. All want to be a Putin presiding over consolidation.

As with most international problems, the current issue of Iran’s nuclear program boils down to a lack of trust and fear of being perceived of as weak. If proposed the United States would do well to a settlement that was modeled along the lines of the “Japan Option.” Doing so would not be “appeasement” or “giving in.” Instead, it would be a clearheaded effort to get right to the heart of the matter: some factions of Iran’s government want nuclear weapons, and most of the rest of the world does not want them to achieve that goal.
A negotiated settlement along the lines of the “Japan Option” would be a very good compromise. While it would certainly upset groups within all the governments involved, it would also provide each side with safety nets. Such an agreement would go a long way towards appeasing those groups in Iran that desire a nuclear weapon, and, at the same time, it would provide Iran’s neighbors with a sense of security. Finally, a “Japan Option”-style agreement would also allow the United States to begin engaging Iran more forcefully over its deplorable human rights record.

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