In order to understand the importance of this you need to understand the link between the financial statements of a company.

I am going to just briefly explain how 2 of them are connected and how this impacts them.

//Thread

#FinanceTwitterJa https://twitter.com/marcgayle/status/1253801562453028864

There are 3 financial statements:
- Income Statement (or Profit & Loss, aka P&L)
- Balance Sheet
- Statement of Cash Flows

Ignoring Cash Flows for this thread.

Income Statement shows all revenue & expenses.

Revenue - Expenses = Net Profit/Loss

Balance Sheet: Assets = Liabilities + Equity.

Consider this simplified Income Statement:

Year 1

- Revenue = $1M
- Expenses = $800K
- Net Profit = $200K

That $200K moves to “Retained Earnings” on the Shareholders Equity Section of the Balance Sheet.

So next year, the company starts off with $200K in Equity.

Year 2:

Revenue = $1M
Expenses = $1.1M
Net Loss = $100K (or Net Profit = -$100K)

Where does that extra $100K come from? It comes from the Retained Earnings on the Balance Sheet.

So Retained Earnings = $200K - $100K = $100K.

Year 3

Revenue = $1M
Expenses = $1.2M
Net Loss = $200K

Retained Earnings = $100K - $200K = -$100K

So the company either has to raise more equity (by selling shares) or borrow that $100K.

But when they borrow that $100K, they have to pay interest, so their expenses goes up.

So even if they do nothing else, their expenses next year increase by the interest they now have to pay on that loan.

Consider the case when they are consistently profitable, ie the next tweet.

Year 1

Revenue = $1M
Expenses = $500K
Net Profit = $500K

They declare a dividend of $200K

Dividend = $200K
Retained Earnings = $300K

So next year rather than starting with Retained Earnings of $500K, they are starting with $300K.

Suppose expenses jump dramatically...

Year 2

Revenue = $1M
Expenses = $1.4M
Net Loss = $400K

Retained Earnings = $300K - $400K = -$100K.

They now have to borrow $100K.

Whereas if they didn’t pay that $200K dividend, they could just absorb it out of the $500K and still have $100K left in Retained Earnings.

So what BOJ & all the DTIs are doing is being cautious.

They are likely to experience losses or a significant reduction in profits in the best case scenario.

The best position for them to be in is to retain their earnings so they can absorb losses.

We want banks to be able to absorb losses temporarily so they can keep credit in the system.

This is why this move is so important.