Background: Individuals with diabetic peripheral neuropathy (DPN) have deficits in sensory and motor skills leading to inadequate proprioceptive feedback, impaired postural balance and higher fall risk. Objective: This study investigated the effect of sensor-based interactive balance training on postural stability and daily physical activity in older adults with diabetes. Methods: Thirty-nine older adults with DPN were enrolled (age 63.7 ± 8.2 years, BMI 30.6 ± 6, 54% females) and randomized to either an intervention (IG) or a control (CG) group. The IG received sensor-based interactive exercise training tailored for people with diabetes (twice a week for 4 weeks). The exercises focused on shifting weight and crossing virtual obstacles. Body-worn sensors were implemented to acquire kinematic data and provide real-time joint visual feedback during the training. Outcome measurements included changes in center of mass (CoM) sway, ankle and hip joint sway measured during a balance test while the eyes were open and closed at baseline and after the intervention. Daily physical activities were also measured during a 48-hour period at baseline and at follow-up. Analysis of covariance was performed for the post-training outcome comparison. Results: Compared with the CG, the patients in the IG showed a significantly reduced CoM sway (58.31%; p = 0.009), ankle sway (62.7%; p = 0.008) and hip joint sway (72.4%; p = 0.017) during the balance test with open eyes. The ankle sway was also significantly reduced in the IG group (58.8%; p = 0.037) during measurements while the eyes were closed. The number of steps walked showed a substantial but nonsignificant increase (+27.68%; p = 0.064) in the IG following training. Conclusion: The results of this randomized controlled trial demonstrate that people with DPN can significantly improve their postural balance with diabetes-specific, tailored, sensor-based exercise training. The results promote the use of wearable technology in exercise training; however, future studies comparing this technology with commercially available systems are required to evaluate the benefit of interactive visual joint movement feedback.