Sino-Japanese relations in the 21st century remains central to maintaining peace and stability in East Asia. However, increasing military assertion by China is shifting the balance of power in the region rendering peace-time defenses weak. Since 2010 growing skirmishes and tensions over the disputed Senkaku/Diaoyu islands prompted Japan to develop its understanding of deterrence and re-imagine its role within the U.S security alliance. While it does not possess nuclear weapons of its own, Japan depends on the assurance of the U.S. nuclear umbrella to protect against nuclear and non-nuclear attacks. In this new security environment, where the nature of the conflict is neither black nor white, the role of nuclear weapons to deter lower-level conflicts remains disputed. This paper seeks to explain Japan’s approach towards deterrence against gray zone coercion in the East China Sea. The focus would be on understanding: Japan’s new defense policy of “dynamic defense” unveiled in the 2010 National Defense Program Guidelines; the role of U.S nuclear umbrella in the bilateral security alliance since the end of the Cold War; and Japanese perspectives on the concept of strategic stability and its application in U.S-China relations. Japan’s active engagement in this context reveals new thinking on concepts like risk-taking and escalation control in gray-zone situations.