I always assume that the reason for taking Iwo was multi-factored. The Admiralty obviously pinned certain islands on a map as "vital" to the war in the Pacific. Peleliu and Midway were also tagged as being somewhat useless. We had 6mo of defeats after entering the war, and battles were vital to keep up the morale. I would question how many casualties they would have allowed to take some of these islands, regardless of benefits offered by its capture.
Then you have the draw of Imperial Navy ships that an invasion would have. We all know that these islands could be skipped without supplies and men from a Navy drop, so this was another draw for attacking islands IMO. We had to destroy the Imperial Navy, and it was a formidable task. They offered a lifeline to all Japanese troops outside of the mainland, as well as a significant threat to all of our holdings in the Pacific. Don't forget that the West and East coasts were always "at the ready" for an invasion and it was believed to be a real threat at that time (Aleutian Islands as ex.)
Regardless of who had the island before, taking "savage" held land would help the war effort, so there is an obvious propaganda edge to it. Taking an island in "Tojo's backyard" is a huge morale boost and shows some sort of closure to the war, both to the US pop and the Japanese.
Finally, you have the option of a supply storage and concentration point for the upcoming invasion of the mainland. It is not efficient to sail supplies across the ocean as they are needed and a collection point would have been needed. Remember, the invasion would have included more supplies and men than D-day. Fighter support would have been needed for ground forces, and this would allow shorter range land based planes to help the mainland invasion.
I don't feel bad for the Japs during that war. They committed atrocities on civilians and soldiers alike and had no respect for the "rules of war". I could go on about their actions during the war. All of that to say: after years of war, being stuck on an island compared to Hell, living underground and in mud, parasites, etc, as well as starvation and dehydration....imagine being on that island during the air and naval bombardment, knowing you were about to either be killed or have to kill yourself. There was absolutely ZERO options off that island as a Japanese soldier.