Java APIs have been used to create world-class games and simulations. The graphics area where you have a question is one of the strong areas of this development. In my opinion it often results in a perfect match of performance and quality graphics. The shadows, anti-aliasing, shading, bump-mapping, sounds, collision detection, damage model, and input configuration are all strong areas. It tends to lend itself well to realism and departing from fantasy environments, but I have seen some fabulous fantasy games made in this genre. Cross-platform, OS and hardware, is built into them which is another consideration for some developers.
About image file formats, bitmaps are a good choice when performance is not an issue, but otherwise with performance critical games then JPEG would be a better choice. Lossless images add to a big demand in performance in scenes where there are many of them. For performance demands, then also include shading and in particular bump-mapping.
A good Java API will make all of these choices available to you. Third party libraries with well designed editors are another matter for choosing an API, such as terrain editors.