The 26-cap midfielder returns to the Midlands almost two years after leaving boyhood club Birmingham City for Rennes in a reported £4m deal.
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James spent last season on loan at Leicester City, where he impressed with 11 goals from midfield and was named the club’s player of the season despite their relegation to League One.
He made 24 appearances for Rennes across all competitions in 2024-25.
The 21-year-old, son of former Wales semi-professional international Tony James, becomes Wolves’ fourth summer signing.
He follows Kieran Trippier, Raul Jimenez and Rafiki Said, while also becoming the second addition since the appointment of Vitor Peixoto as head coach in June.