James, 21, has only played one senior international after starting in the 54-8 victory over Romania in Wrexham during the summer friendlies.
However he has captained the Wales Under-21 side, most notably to Grand Slam in this year's Six Nations Championship.
'He played very well in that game and we were impressed by his attitude in training as well,' said Wales coach Steve Hansen.
'He will be flying out on Tuesday and will meet us in Sydney ahead of the All Blacks game.
'It's very sad for Duncan as he was playing very well for us and it's a shame for any player to be ruled out in that way.'
Fellow Osprey Jones fractured the lower fibula in his right leg after just 24 minutes of Saturday's clash with Italy.