In Chapter 9 of the novel, the Professor provides the geography lesson we need to understand the setting, and then Mr. F provides many reasons for the families not being worried about being seen by outsiders.
First of all, the professor notes that Krakatoa
... was situated...between Sumatra and Java and that it was about twenty-five miles from both of these two huge islands (137).
Mr. F then explains that the Balloon Merry-Go-Round is a sky blue color, so it cannot be seen from very far away, that it doesn't go more than five or six miles, so it cannot be seen from the neighboring islands at all. He goes on to explain that a previous violence of the mountain on Krakatoa had been so extreme that there was a tsunami and violent shaking, and great noise. So, the people on Sumatra and Java had all moved twenty-five miles inland, which meant that they were all at least fifty miles away from Krakatoa. All of these factors combined meant that the families were safe from discovery when they went on their excursions in the Balloon Merry-Go-Round.