What exactly does "Java is an interpreted language" mean?

interpreted as opposed to what?

It means Java (like e.g. Pascal and C) can be interpreted. An interpreter reads byte code and executes its operations. Often Java is interpreted in small devices (cell phones, TV set top boxes). Back when Java first came out, the first Java environments were interpreters.
Java (like e.g. Pascal and C) can also be compiled. One popular compiler is Hotspot, which is included in the Sun JDK. Hotspot is a "dynamic compiler": it compiles often executed code while a Java program is being run, and interprets code that is executed only a few times (e.g. initialization code). In contrast to a dynamic compiler, a JIT (just-in-time) compiler doesn't include an interpreter; a JIT compiles everything. IBM, BEA and Oracle are other major Java compiler vendors.
There are also so-called "static compilers", which write the compiled code into a file. These usually produce less efficient code than JITs or dynamic compilers, because they cannot perform optimizations like non-static method inlining or using CPU version-specific instructions.
Often the claim "Java is interpreted" is a hold-over from the early days; people heard of the first interpreter and it stuck.

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