Game balance is the balance between the systems that construct the whole game.
In general, it comes down to the systems’ degrees of difficulty, but factors influencing this include the difficulty of infinite combos and death combos (and the number of bozos going around using them); because human vs. human competition ultimately defines how a game is played, whether there are seriously high-tier and low-tier characters is also an essential factor.
From a game design and marketing perspective, if these are not put in order, the game will feel uncomfortable, and players won’t want to play it, so it is essential for developers and player organizations (such as tournaments and arcade operators) to regulate it somewhat. It’d be bad if specific characters could achieve a checkmate, for example.
It’s nice when characters you use often and your favorite characters happen to get buffed, and it’s disappointing when they get nerfed. But you have to respect it for the greater good of the game: if your characters get too strong, other players might dislike you just for using them.
Still, it is important not to nerf a character too much; this would be a significant change for the worse, and would dissatisfy the playerbase. Lots of exhilarating combos have been cut off this way, rendering the fans’ practice bunk.
In truth, there is no such thing as a perfectly-balanced game. No matter which game, there will always be characters that aren’t quite as competitive as the rest (whether they utterly dominate or truly stink). This can lead to the disappearance of characters in series (Lin and Foxy disappeared after KOF 2001; Daimon after 2003), if not competitions (in serious Hokuto no Ken tournaments, characters other than Toki, Rei, Juda, and Raoh are not chosen often).