Exactly this. Power is not just capability. Power is resolve + capability. Why do people fear yet trust Russia even after its bog down in Ukraine? why do Southeast Asians respect Vietnam? Because despite a lack of capability they make up for it in resolve.
Resolve means the willingness to take damage or die for your cause. That means less capability is necessary to achieve deterrence because others will see that you will drag them down with you even if they're stronger, and that you are willing to eat some pain to bury them if you're stronger. Low resolve high capability means they still won't be deterred, since all they have to do to get you to back off is bite back a little.