The Colombia international midfielder has fallen out of favour at the Santiago Bernabeu after an unimpressive 2015-16 season but his old coach backs him to come good
Ancelotti was head coach at the Santiago Bernabeu when James left Monaco for Madrid after starring at World Cup 2014 for Colombia.
The midfielder proved a hit in his first campaign in the Spanish capital, scoring 13 goals in 29 top-flight appearances, but he struggled for form last term and has regularly found himself out of the team under Zinedine Zidane, leading to widespread reports of a potential exit over the summer.
But Ancelotti believes that it is not uncommon for a player to lose form and backs the 25-year-old to come good.
"I was surprised [James lost his form] a little bit but he is very young," he told AS.
"Sometimes not everything turns out well. One year, you can have problems. The important thing for a player is to keep fighting, even if you do not play every game.
"Playing in Madrid is not easy because there is much competition."
Ancelotti, now coach at Bayern Munich, also stated that Madrid's triumph in last season's Champions League was not purely down to Zidane's preference to play Casemiro in midfield over James.
"Zidane's great success was winning the Champions League," he added, "[but] I played one season with [Luka] Modric, James and [Toni] Kroos and we went on a streak of 22 [wins] with those three.
"Everything depends on the commitment the players have."