The limitation isn't the Java version, it's the way the MC code was architected.
Iirc part of original Minecraft's performance limitations were high object create/destroy rate leading to lots of garbage collection. With that in mind, picking a non-GCd language isn't completely crazy.
It was the other way around: say, the original code as written by Notch had functions like setPosition(x,y,z) and it was okay. When Jeb got in charge, he said "it's not object-oriented enough" and rewrote everything to setPosition(position). And boom, 1GB/sec allocations...
Iirc part of original Minecraft's performance limitations were high object create/destroy rate leading to lots of garbage collection. With that in mind, picking a non-GCd language isn't completely crazy.