England, who host Switzerland in a Euro 2012 qualifier on Saturday, were embroiled in tales of dressing-room unrest at last year's World Cup and newspapers were filled with criticism of Capello's handling of the team captaincy earlier this year.
However, Capello's decision to let his players take a holiday before this weekend's match at Wembley has lifted spirits as has the fact that he has promised to give them a break before next year's European Championship, assuming the Group G leaders qualify.
"With him bringing us in the loop with those conversations... the communication between the players and manager has been fantastic," Terry told a news conference.
"It's been a really relaxed atmosphere over the last three or four months... the training has been very intense but at the same time very enjoyable and the players are playing with a smile on their face at the moment which is the ideal situation."
Central defender Terry drew criticism from Capello at the World Cup in South Africa for talking to the media about player unrest in the squad rather than discussing issues with the manager first. Terry later apologised but the public damage was done.
Capello was mocked by the media this year for saying he needed only 100 English words to communicate with his team, while a decision to speak about a private meeting with Andy Carroll in which he asked the striker to drink less was also questioned.
The Italian was also widely criticised in March for failing to tell then-skipper Rio Ferdinand face-to-face that he would be passing the captain's armband back to Terry, but said that they had cleared up the matter in a private meeting on Tuesday.
"We shook hands and the relationship is perfect," Capello told a news conference.
Terry said it was not just Ferdinand's and Capello's relationship that was in good shape.
"It's with everyone," he said. "The manager's relationship I think over the years has got better and better every time we meet up... we've got a really good balance at the moment."
Capello's move to let the players take a break after the league season came after he blamed fatigue in part for last year's World Cup debacle where a series of dismal displays ended with a one-sided, second-round defeat by Germany.
"I learned a lot at the World Cup, I learned the players are rather tired at the end of the season," said the Italian.
"I think (being) on holiday is good, they recover their forces, their mind energy. It is really important.
"They returned happy and I needed to stop sometimes the training because they were too happy when they played - like children."
England are level on points with Montenegro at the top of Group G with 10 points from four matches, while Switzerland are third with four points. Bulgaria (four points) and Wales (zero) are the other teams in the qualifying group.
