The 20-year-old right-back has impressed for Chelsea this season following a loan spell with Wigan Athletic in the championship last term.
James only made his Chelsea debut in September in the 7-1 win over Grimsby Town in the Carabao Cup and has gone on to make 18 appearances in all competitions for Frank Lampard’s men, scoring two goals.
James follows in the footsteps of fellow academy graduates Mason Mount, Callum Hudson-Odoi and Fikayo Tomori, who have all penned long-term deals at Stamford Bridge this season.
On signing his new five-and-a-half-year deal, the defender said: ‘It has been my dream to be here at Chelsea and play week in week out and to have a contract for another five-and-a-half years is living the dream again.
‘I have always wanted to be here and another five-and-a-half years means a lot to me and a lot to my family.’
Chelsea director Marina Granovskaia added: "The smooth way Reece has fitted into the team so quickly despite missing the start of the season has been clear for everyone to see.
"Reece started his football education with us at the age of six and his performances on loan at Wigan last season paved the way for a strong beginning to his career in the Chelsea team.
"We're very pleased he now has the perfect opportunity to build on that and become a major player for us for many years to come."
