In this paper, spectral processing of laser Self-Mixing (SM) interferometric signal phase has been carried out allowing better measurement accuracy for harmonic and arbitrarily shaped vibrations for an optical feedback based SM interferometric Laser Diode (LD) sensor. The resulting algorithm not only improves the measurement accuracy but also reduces the processing time (by a factor 3.45) as compared with a previous time-domain based displacement retrieval technique called the Phase Unwrapping Method (PUM). Fourier series based analysis of laser feedback phase is carried out to determine processing limits. The proposed algorithm has also been found to be robust against variation in optical feedback coupling C as well as additive noise. This use of spectral analysis not only increases the measurement accuracy but also retrieves information about target movement harmonics which can also be used in modal analysis applications of remote mechanical targets. Using an SM vibration sensor based on a LD emitting at 785 nm, this technique has provided an average RMS error of 12.5 nm (while that of PUM is 39 nm RMS) for harmonic target vibrations of 5 μm amplitude. For reduced range of 1