He overcame a slow start to enjoy a productive title-winning debut campaign with Bayern and now has 10 goals and 14 assists for the club to his name.
Questions have been asked of his next move throughout a spell at the Allianz Arena and continue to tick over heading towards the summer.
Officials in Munich will leave Kovac to make a decision on whether or not to pursue a permanent deal, with club president Uli Hoeness telling Sport1: “It depends very much on whether Niko Kovac says: 'I want to keep him'.
“If he says, 'he's a great player but won't play regularly under me', then we can't pay the transfer fee.
“It all depends on what we want. We have an option that we can choose to take up or not. If we choose to do so, he'll stay.”
James started all six of Bayern’s games in February and has earned praise from Kovac.
The Bayern boss has said of the South American playmaker: “He's very good.
“He's got good awareness and positioning and what I personally like a lot is that he always puts himself at the team's service.”
James, meanwhile, has said of his future: "I have to think hard about what I'm doing [in terms of my future]. In Madrid, I have everything: my house, people who love me.
"We will have to see what happens, but at the moment I have a contract with Bayern Munich. I just want to finish the season and we'll see what happens."
The purchase option in James’ Bayern deal is reported to stand at €42 million (£36m/$48m).
If he continues to impress in Bundesliga and Champions League competition over the remainder of the campaign, then Kovac and Co will have no issue with triggering that clause and securing themselves a proven performer at the very highest level.