This paper describes a new approach to the algorithm and fundamental characteristics of the device for monitoring the leakage currents flowing through zinc oxide (ZnO) surge arresters. In order to obtain a technique for a new on-line monitoring device that can be used in the deterioration diagnosis of ZnO surge arresters, the new algorithm and on-line leakage current detection device for extracting the resistive and capacitive currents using the phase shift addition method were proposed. The computer-based on-line monitoring device can sense accurately the power frequency leakage currents flowing through ZnO surge arresters. The on-line leakage current monitoring device of ZnO surge arresters proposed in this work has the high sensitivity compared to the third harmonic leakage current detection devices. As a consequence, it was found that the proposed leakage current monitoring device would be useful for forecasting the defects and degradation of ZnO surge arresters.