Act I
Act I. scene 1 of The Teahouse of the August Moon takes place at an American military base on the Japanese island of Okinawa during the American Occupation of Japan in the aftermath of World War II. Sakini. a local Okinawan interpreter for the American military, speaks directly to the audience, introducing the setting and historical circumstances of the play in which Colonel Purdy is in charge of instituting the Americanization of the local culture.

Captain Fisby, a young officer, arrives at the base and is assigned to the tiny village of Tobiki to carry out "Plan B," which includes the institution of a local democratic government, the establishment of a capitalist economy, and the building of a schoolhouse. In scene 2, Fisby is delayed in his departure for Tobiki when an entire clan of local people, including a grandmother, daughter, grandchildren, and family goat, among others, crowd onto the jeep with their belongings, expecting a ride to the village. Against the officers' protests, they remain on the jeep for the duration of the journey. In scene El, Captain Fisby is set up in his office in Tobiki, along with Sakini as interpreter. The local villagers crowd around to present Fisby with gifts. He gets the villagers to appoint department heads for the setting up of a local democratic government. A Mr. Sumata presents Fisby with the gift of his daughter, Lotus Blossom, who is a geisha.

Act II
Act II, scene 1 takes place in Tobiki, a few days later. Fisby, mistaking Lotus Blossom for a prostitute, disapproves of her popularity among the local men and her influence among the local women. Sakini, however, explains to him that she is a geisha, a woman who plays a traditional role in Japanese culture that includes the serving of the traditional Japanese tea ceremony.

The newly appointed local government has used the democratic process to vote for the building of a local teahouse in which Lotus Blossom can serve the local men After fruitless protest, Fisby agrees to allow the materials intended for the building of the schoolhouse to be used to build a teahouse instead. Scene 2 takes place a few weeks later when Purdy calls Fisby to get a progress report on the implementation of"Plan B" in the village. Scene 3 takes place in Fisby's office, a few days later. Purdy, suspecting something amiss with Fisby's behavior, has sent an army psychiatrist, Captain McLean, to examine Fisby. Fisby, by this point, has almost completely accommodated himself to the local culture with much help from Lotus Blossom. He wears his bathrobe, a makeshift kimono, wears the local footwear, and munches on local snack foods. McLean, however, is quickly enticed into overseeing the planting of crops for the villagehorticulture being a personal passion of his. When Colonel Purdy calls to get a report on Fisby from McLean, McLean requests to spend more time in the village, supposedly to evaluate Fisby.

In scene 4, the villagers have returned from a nearby market where they failed to sell their local products, such as cricket cages and lacquered dish-ware. Fisby, however, learns of a local recipe for sweet-potato brandy, which he decides to market to the nearby military bases. He arranges for the mass production of the brandy by the villagers and immediately sells a large order at a great profit.

Act III
Act III, scene 1 takes place at the newly built teahouse, several weeks later. Fisby is presented with a birthday gift A wrestling match is held in the teahouse, as entertainment. As Fisby and McLean are leading the villagers in singing "Deep in the Heart of Texas," Colonel Purdy arrives unexpectedly. McLean and Fisby are immediately chastised for misusing the building materials intended for the schoolhouse and for marketing the liquor. Purdy orders that the teahouse be torn down and the brandy distilleries destroyed. Sakini, however, informs Fisby that the villagers have cleverly moved and hidden both the teahouse and the distilleries, only giving the impression of having destroyed them. Colonel Purdy then receives word that the village is to be presented as an example of successful democratization and instructs Fisby to restore the teahouse and distilleries.