The system was given a 20 trillion yen ($169 billion) boost last October to help small firms weather a severe credit crunch and stave off bankruptcy.

The money was meant to tide the scheme over until March 2000. But over 13 trillion yen had already been allocated to 6,76,000 firms as of the end of February, and officials see the rest of the money running out as early as August.

``There will be no funding left for the remaining six months of the fiscal year (1999-2000),'' credit manager Koichiro Eguchi at the National Federation of Credit Guarantee Corporations (NFCGC), which oversees the 51 regional organisations approving small-firm credit guarantees, told Reuters Television on Thursday.

``The government will most likely increase the guarantee funding by a figure close to 10 trillion yen...that'sthe kind of supplement I expect,'' Eguchi said.

Earlier this month, trade minister Kaoru Yosano said he would wait until May before deciding how much extra money to allocate.

Director of finance at the trade ministry's small and medium enterprise agency Shinya Kuwayama fended off criticism that the extra funds would just delay much-needed corporate restructuring even further.

``Corporate restructuring is needed for economic recovery. But if we hadn't provided stopgap funds from last October there would have been no companies left to restructure. We have just bought firms some time,'' Kuwayama told Reuters Television in an interview.

The number of bankruptcies among small firms has dropped as the government relaxed conditions for granting the guarantees. The refusal rate for credit guarantees has fallen from 10 per cent in October to just 0.19 per cent in March.

The government says it is prepared to accept the additional risk from its credit expansion.

``We have built our assumption on the viewthat 10 per cent of applicants in this period will default, and up to one trillion yen's worth of loans will prove uncollectable,'' MITI's Kuwayama said.

But government officials admit they could end up shouldering an even larger amount of the corporate debt burden. The current calculation assumes that small firms' business conditions will improve enough by the autumn, as the economy recovers, to offset rising pressure to cut costs.

``If the Japanese economy gets any worse, it's difficult to envisage the default ratio remaining under 10 per cent,'' the NFCGC's Eguchi said.

MITI's Kuwayama added: ``I don't want to think of the worst. But we could have to consider increasing the amount of emergency credit guarantees even above 30 trillion yen or extending the period beyond March 2000.''