The 20-year-old, who arrived at the Banks's Stadium from Doncaster Rovers in the summer, has made 23 appearances for the club this season, scoring three times in the process.
Baxendale told the club's official website: "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."
Meanwhile, 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."
Walsall currently sit 13th in the League One table.