The 20-year-old arrived at the Banks's Stadium in the summer on a one-year deal following his release by Doncaster.
He has duly impressed for the Saddlers this term, making 23 appearances - 16 of which starts - and scoring three goals.
Baxendale said: "This is a good club and I am really enjoying my time here. I feel my game has developed well in the short time I have been here already and now I want to really kick on.
"The spirit around the place, from the manager down, is excellent and I am pleased to have signed this new deal. I am extremely excited about what the future holds in store here."
Boss Dean Smith added: "James has displayed outstanding character and showed us exactly what he is capable of. He's had a good run in the team and scored some impressive goals so far.
"He's a great personality and has a real zest for football. It's a pleasure to have him around the place and I am delighted he has agreed this new deal as he is a great prospect."