Well I went to the tire shop and we checked the sizing the hard way. They had a set of 16" wheels there (Sacchi S2 16x7 40mm offset) and the mounted them on my 89 Mazda 323. They were close to the suspension parts, but still room for movement. They mounted a Nexen N3000 summer tire in a 205/40/16 size and checked clearances again. Everything just fit in there. The tires were close to the rear shock and the front strut, but not enough to stop the tire from turning. The fender wells were close to the tires edge on the other side, so if some really heavy weight was put in the back seats, it may come close to hitting the tires in the rear. Better shocks would help there. So this 16" combo technically fits ok.
About shocks- for the 89 I noticed KYB GR-2 shocks and Tokico HP shocks. Is either of these recommended to stiffen up the suspension in the rear?