The 20-year-old, who shot to prominence at Hartlepool, will not be allowed to play against Posh as part of the agreement but there is no recall clause in the deal.
James, who struggled to make an impact at London Road, told the Bantams’ official website: “I knew I probably would have to go out on loan from Peterborough so I was pleased when I heard of Bradford’s interest – they are a huge club.
“I’m hoping I can use this loan period to show people what I can do. That means getting a few goals and a few assists.
“There is a really good squad of lads here and we’ll be hoping to do things this season. I want to try and be a part of that.
“I’d like to hit the ground running and show the fans what I can do.”
James signed a four-year deal with Posh after leaving Hartlepool last August in a move thought to be worth £500,000 but managed just two goals in 33 appearances.