The Colombia international spent the last two seasons on loan at Bayern Munich and has been heavily linked with a departure from the Santiago Bernabeu this summer.
However, Madrid boss Zinedine Zidane has now decided to keep the playmaker at the club.
Zidane now views James as an important player for the season ahead, although it remains to be seen whether he will appear in Saturday's clash with Celta Vigo.
The former Monaco man has won one La Liga title and two Champions Leagues at Madrid.
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