Inner classes can be created within a method or even an arbitrary scope. There are two reasons for doing this:

1. We’re implementing an interface of some kind so we can create and return a reference.

2. We’re solving a complicated problem and we create a class to aid in we solution, but we don’t want it publicly available.

local inner class (an entire class within the scope of a method), for example:

// innerclasses/Parcel5.java
// (c)2017 MindView LLC: see Copyright.txt
// We make no guarantees that this code is fit for any purpose.
// Visit http://OnJava8.com for more book information.
// Nesting a class within a method

public class Parcel5 {
  public Destination destination(String s) {
    final class PDestination implements Destination {
      private String label;

      private PDestination(String whereTo) {
        label = whereTo;
      }

      @Override
      public String readLabel() {
        return label;
      }
    }
    return new PDestination(s); // upcasting
  }

  public static void main(String[] args) {
    Parcel5 p = new Parcel5();
    Destination d = p.destination("Tasmania");
  }
}

The upcasting in the return statement means nothing comes out of destination() except a reference to a Destination interface. The fact that the name of the class PDestination is placed inside destination() doesn’t mean PDestination is not a valid object once destination() returns. We can use the class identifier PDestination for an inner class inside each class in the same subdirectory without a name clash.

Then, see how we can nest an inner class within any arbitrary scope:

// innerclasses/Parcel6.java
// (c)2017 MindView LLC: see Copyright.txt
// We make no guarantees that this code is fit for any purpose.
// Visit http://OnJava8.com for more book information.
// Nesting a class within a scope

public class Parcel6 {
  private void internalTracking(boolean b) {
    if (b) {
      class TrackingSlip { // inner class, after compiled it is Parcel6$1TrackingSlip.class
        private String id;

        TrackingSlip(String s) {
          id = s;
        }

        String getSlip() {
          return id;
        }
      }
      TrackingSlip ts = new TrackingSlip("slip");
      String s = ts.getSlip();
    }
    // Can't use it here! Out of scope:
    // - TrackingSlip ts = new TrackingSlip("x"); // [1]
  }

  public void track() {
    internalTracking(true);
  }

  public static void main(String[] args) {
    Parcel6 p = new Parcel6();
    p.track();
  }
}

[1]'s compile error:

innerclasses/Parcel6.java:25: error: cannot find symbol
    TrackingSlip ts = new TrackingSlip("x");
    ^
  symbol:   class TrackingSlip

references:

1. On Java 8 - Bruce Eckel

2. https://github.com/wangbingfeng/OnJava8-Examples/blob/master/innerclasses/Parcel5.java
3. https://github.com/wangbingfeng/OnJava8-Examples/blob/master/innerclasses/Parcel6.java