Micro-displacement measurement based on self-mixing interference using a fiber laser system was demonstrated. The sinusoidal phase modulation technique was introduced into the fiber laser self-mixing interference measurement system to improve the measurement resolution. The phase could be demodulated by the Fourier analysis method. Error sources were evaluated in detail, and the system was experimentally applied to reconstruct the motion of a high-precision commercial piezoelectric ceramic transducer (PZT). The displacement measurement resolution was well beyond a half-wavelength. It provides a practical solution for displacement measurement based on all optical-fiber sensing applications with high precision.