The Frenchman was feared as the club's most expensive flop of all time.
But Arteta has allowed Pepe to slowly adjust to the country and league, and now he is showing his best from for the Gunners.
"The fact that we have the Europa League gave the opportunity to almost everyone in the squad to be fit and available and compete for their place," Arteta told reporters ahead of Thursday's clash with Benfica.
"[Pepe] has had some really good matches and scored some important goals as well and I think that has helped him for the Premier League form and the recent form that he's shown.
"I've seen a lot of things, in his mentality, the way he approaches every training session, in his understanding of the game as well.
"It's true that he has patches where he's played more than at other times. He has had the opportunity over the last couple of months that probably every player has been seeking to have but I think overall there is a lot of progress with Nico."