Custom exceptions in Java are user-defined exception classes that extend the existing exception hierarchy. They allow developers to create specific error types tailored to their application’s needs, enhancing error handling and debugging. By defining custom exceptions, programmers can provide more meaningful error messages and differentiate between various error conditions. This is particularly useful when developing APIs or libraries, as it enables users to catch and handle exceptions specific to the API, rather than relying solely on generic exceptions. Custom exceptions can be created by extending either RuntimeException for unchecked exceptions or Exception for checked exceptions, depending on the desired behavior.