I'm in the middle of Xenoblade now, absolutely loving it. Is it the best RPG this generation? No. I just came off of Deus Ex, which was extraordinary. I'd say Mass Effect 2 and Fallout 3 were top-notch and would probably eek out a win over Xenoblade in the end, as well. But if we're talking JAPANESE RPGs, there's no competition... no, really, there's no competition, Xenoblade is in a completely different league than the rest.
I think the more interesting question is, how does Xenoblade stack up against jRPGs last generation. The answer is, "near the top", to be sure, but last generation had some amazing games and it would be difficult to say that Xenoblade kills all of them. However, it lives right up there with the best of last gen.