The 28-year-old Northern Ireland international moved to Easter Road in January and impressed sufficiently in 15 appearances for manager Pat Fenlon to make the deal permanent.
"It's an honour to play for Hibs again," said McPake, who joined from League One Coventry.
"From day one, I felt at home at the club and I developed a special relationship with the supporters.
"I'm excited to be part of what will be a new-look Hibernian team and I'm looking forward to playing my part in bringing success back to this football club."
McPake, who last featured in the 5-1 Scottish Cup final defeat to Hearts, will join up with the club for Monday's first day of pre-season training and joins fellow defender Tim Clancy in joining Hibs this term.
"It's absolutely fantastic that we've been able to bring James back to the club on a permanent basis," Fenlon said. "We have had to be patient and persistent but all the work has been worthwhile.
"Every team needs a strong leader and James is my captain - he leads by example and sets himself high standards.
"He made a really positive impact during his loan spell and moving forward he will play a major role in the ongoing development of the club over the next few seasons.
"At the core of every successful team are strong-minded competitors and James will also help to bring on the younger players in the squad.
"With the arrivals of Tim and now James, we have started to make good progress towards rebuilding the squad and bringing in the right characters.
"There is much more to be done and we will keep working away trying to secure our other targets."