The 25-year-old midfielder has signed a short-term loan deal with the Championship club which will see him play for the Tykes for the remainder of the season.
James has endured a tough run of late after missing all of the Foxes' premiership season with a serious knee injury and has only featured for the U23 side this campaign, but now gets the chance to play regular football.
"He has shown a real passion and desire to be here and help the Club continue our rise up the league and that's exactly what we need at Barnsley Football Club.
"He will fit straight into the mentality that we already have within the squad and adds much needed quality as well as versatility to our midfield areas.
"He brings Premier League experience along with a knowledge of how to get promoted in the Football League as well.
"I know that there was other interest and we had to fight that off, but ultimately it was Matty's decision and he picked to join us and this shows that we can attract players from the best league in the world."