James, who made the Swans bench for a Premier League game at Stoke last season, signed on Friday afternoon and will join the squad when they jet out to Portugal on Sunday for a warm weather training camp.
The 19-year-old was called up to the full Wales squad for a World Cup qualifier in Serbia earlier this year, although he did not make his international debut.
Boss Paul Hurst said: "He’s only slight in stature but certainly impressed us on the few occasions we watched him last season.
"Speaking to other people, he's well thought of – an exciting player that will hopefully add to our attacking options.
"I spoke about our central midfield options being pretty complete and now, with the addition of Dan, in wide areas that'll be us done.
"We’ve been trying to do the deal for a while now, we were told we had a good chance of completing it and are delighted that he's finally signed and he'll be on the flight to Portugal.
"Swansea bought him from Hull City, so that shows the talent that he’s got, to buy a young player especially from a club like Hull that are very good themselves anyway.
"He's got pace to burn, he's direct. He knows Dom Smith, I was chatting with Dom about him and he said a part of him reminds him of Shaun Whalley.
"There's no guarantees just because he’s from Premier League club, but I’m really really pleased because it's been in the background for a little while this one so I’m glad that it’s done.
"I spoke of the central area giving me a headache and that's what its going to be out wide as well. It should help to raise standards and with the games coming they now they've got to be right at it because none are guaranteed anything. They’ll be picked purely on who is in best form to have that real positive impact in the games."
James came through the youth set-up at Hull City, spending eight years with the Tigers at youth level before making the move to South Wales in August 2014.
Born in England, he qualifies for Wales through his dad who is from Aberdare.
"I'm really pleased to be here and looking forward to the season," said 5ft 7in James.
"I heard about it a while ago but it wasn't until yesterday that I knew anything about it and I got here this morning.
"I've heard great things about them, I know Tyler Roberts was here, who I'm good friends with.
"He said it was a really good club and a lot of people have told me it's a friendly club, which helped me to choose to come here.
"I know Tyler did very well and he got on well with the fans and the boys here, so I want to do as well as him – if not better!
"The gaffer showed me around and introduced me to everyone.
"It's my first loan spell so I want to settle in first and get to know the boys, then hopefully play games and get them up the table."