World Cup star James took time to settle in Spain after arriving in a £69m deal from Monaco this summer, but has been in exceptional form in recent weeks.
"Players like James fit into any system and team in the world," Arbeloa told the club's official website. "He is world class, an absolutely brilliant player, and it's a blessing for any coach to have players like him. We're very happy with him."
James has scored six times in 17 appearances across all competitions for Real Madrid this season.