TOKYO -- The policy-making circus in Japan is outdoing itself these days. For the past few weeks, the skies over Tokyo have been filled with trial balloons set aloft by prominent lawmakers in the ruling

Liberal Democratic Party

(LDP). They want to pass another spending package later this year in an attempt to keep this anemic economy afloat as the stimulus measures in the current budget begin to peter out.

No sooner are these balloons released, however, than other lawmakers and officials at the tight-fisted (and powerful)

Ministry of Finance

blast them out of the sky with big-bore statements that the government is "absolutely not thinking about" another budget.

Oh yeah! There's not an economist in town who honestly believes

Prime Minister Keizo Obuchi

can possibly fulfill his promise to eke out 0.5% growth this fiscal year without another spending package. Most are predicting negative growth even with additional stimulus.

Nearly every year since the bubble economy burst in late 1989, Japan's lawmakers have passed meaty supplementary budgets to keep the floor under growth when spending from initial budgets, now front-loaded with construction projects as a matter of course, tapered off. Last year, the initial budget was roughly 78 trillion yen ($640 billion), which was followed by two supplementary budgets, bringing total expenditures to 88 trillion yen. This year's initial budget was nearly 82 trillion yen. Without a supplementary budget to plug the hole, this economy will fall flat on its face.

Why the official denials that another budget is under consideration by political heavyweights such as

Chief Cabinet Secretary Hiromu Nonaka

? First, less than two months ago, the Obuchi government passed the fiscal 1999 budget, the biggest in Japanese history. By publicly discussing an extra budget at such an early date, the prime minister would be implicitly admitting flaws in the initial budget.

Second, politicians are still spooked by what happened in the bond market at the end of last year when the Ministry of Finance announced it would no longer buy government bonds. The finance ministry eventually relented, but only after generating a spike in bond yields and driving up interest rates -- which threatened to choke off all hopes of recovery for an economy suffering its worst downturn since the end of World War II. Some politicians fear that talk of more spending and more bonds to finance that spending could precipitate another crisis.

As for the size of the supplementary budget, that of course depends on where the economy is in the coming months. But electoral politics suggests that we're not looking at small potatoes. (Several key LDP members have been throwing around 10 to 15 trillion yen as a ballpark figure.)

Obuchi must run for re-election as president of the LDP in September. His chief challenger in that race is shaping up to be former

Chief Cabinet Secretary Koichi Kato

, who has been taking shots at the prime minister for adopting spending packages that are full of wasteful pork-barrel measures, rather than programs to encourage genuine structural reform.

To head off Kato and to deal with Japan's rising unemployment (now at a record 4.8%), Obuchi is working furiously to get bills passed in this Diet session that include measures to retrain laid-off workers, expand unemployment benefits and finally get some incentives in place for job creation. With these reform measures in place, Obuchi hopes to deflect criticism over a supplementary budget packed with goodies for the LDP's traditional supporters in the real estate and construction industries. He also wants to diminish Kato's chances of defeating him in the presidential race.

More importantly, Obuchi must call an election in the powerful lower house of the Diet, or parliament, before October 2000. There's growing speculation that he'll go to a snap poll late this year or early in 2000 (before a tax hike kicks in on April 1, 2000, to fund a new nursing care plan).

And that's why a large supplementary budget is almost certainly in the cards. If things go according to his plans, Obuchi will win another term as LDP president in September and then convene an extraordinary Diet session in October to pass a second budget. Should the economy begin to show clear signs of recovery then, it's off to the polls. One caveat: If the economy heads further south in the next month, the prime minister may even attempt to pass another budget toward the end of this Diet session, which is scheduled to adjourn on June 17 but may be extended for another month.

As for the supply shock problem in the bond market that more public spending could create, Obuchi probably doesn't have much to worry about. With the

Bank of Japan

keeping the overnight call rate at near zero and with a relatively steep yield curve, government bonds are still attractive to private investors. Demand for credit is weak, compelling banks to park their assets in bonds. Moreover, it looks like the finance ministry, through its

Trust Fund Bureau

, will continue to underwrite Japan's massive public debt for the time being. Basically, in Japan's deflationary environment, demand for government debt is poised to remain strong.

So ignore the current shenanigans over who's saying what in Japan about supplementary budget prospects. The big shots denying that further stimulus is under consideration are simply shooting blanks at the budget balloons to provide themselves with political cover. Obuchi's survival depends on passing a relatively sizable spending package later this year and that's that.

John F. Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute. He writes occasional commentary for TSC. Neuffer publishes an in-depth roundup of Japanese politics at his Web site,

behindthescreen.com. This column is exclusive to TheStreet.com.