Japan Rebuffs Iraqi Deal to Free Detainees : Sanctions: Tokyo stands with U.S. and other allies on boycott, urges Baghdad to release all hostages.

In a gesture of solidarity with the United States and other Western allies, Japan on Thursday rebuffed an Iraqi offer to allow detained Japanese nationals to go free if the Tokyo government would withhold its support of economic sanctions against Iraq.

But it is not clear how much further Japan is prepared to go in participating directly in the multinational effort in the Persian Gulf region, especially in terms of military activity.

Adding to the pressure on Tokyo to expand its role, U.S. Ambassador Michael H. Armacost suggested that now might be the time to break a postwar taboo on deploying Japanese military forces beyond the home islands.

Reports reaching Tokyo from the Middle East indicated that as many as 245 Japanese are “under house arrest” in a Baghdad hotel after leaving their asylum in the Japanese Embassy in Kuwait, purportedly to seek “greater safety” in the Iraqi capital.

It is not clear whether the Japanese moved these people in anticipation of their being allowed to go home. Eight of them, teachers at a Kuwaiti Japanese school and their families, were permitted to fly to Amman, Jordan, on Thursday, a day after a group of 21 Japanese with diplomatic status had gone out.

About 500 Japanese remain in Iraq and occupied Kuwait, but there have been no reports of their being relocated, along with other foreign nationals, to potential military targets as “human shields.”

The Iraqi news agency on Wednesday broadcast an offer to release French and Japanese nationals in a bid to “stop certain parties trailing behind the irrational American stand against Iraq.”

But the Japanese Foreign Ministry said Japan’s policy of joining the U.N.-sponsored boycott will remain unchanged, and it urged Iraq to release all foreigners held against their will.

Prime Minister Toshiki Kaifu’s administration is studying a package of measures it might take to strengthen Japan’s response to the crisis in the Middle East, where Foreign Minister Taro Nakayama has been meeting with local leaders over the last week. New steps are likely to include financial aid for countries most severely affected by the Iraqi boycott, as well as sending non-military personnel such as doctors to the region.

Japan, which imports about 70% of its oil from the Middle East, reluctantly joined the United States and European nations in economic sanctions against Iraq. However, it stopped short of making a military commitment because the prevailing interpretation of its postwar constitution raises questions about the legality of armed deployment overseas.

On Thursday, Armacost became the first U.S. official to state publicly that Washington hopes Japan will consider “direct participation” in military activities in the gulf, including sending minesweepers from its Self-Defense Forces to support the international naval force already in place.

The government is expected to make a decision on its course in the Middle East sometime next week, after Nakayama returns to Tokyo. Officials have said that new laws must be drafted and approved by Parliament, which is out of session until next month, before even non-military personnel can be sent to a potential war zone.

But local news reports suggest that the government is searching for loopholes that would allow it to send volunteers on an informal basis, such as medical teams to help care for Kuwaiti refugees in Saudi Arabia.

Additionally, Japanese policy makers are reportedly reviewing a plan to offset indirectly the financial burden of America’s military activities in the region by increasing the Japanese share of the cost of maintaining U.S. troops in Japan under mutual security arrangements.

Tokyo’s financial markets, meanwhile, continued to fret over the situation in the Middle East, with investors selling stocks and currency speculators selling dollars.

The Nikkei average took its fourth-largest loss Thursday, shedding 1,473.28 points, or 5.84%, to close at 23,737.63--its lowest mark in a year and a half. The Nikkei average, which lost more than 1,000 points Wednesday, is now nearly 40% below the peak it reached at the end of last year.