The Bank of Japan has made a historic rate shift. Here's what could occur next.

• Sustainable price increases would be informed by any decision to hike rates for the first time in 17 years, as BOJ Governor Kazuo Ueda had repeatedly stated that these talks were crucial.
• BOJ officials anticipate that an increase in wages will result in a virtuous cycle, with increased domestic demand driving inflation.
• The selloff in the Japanese yen following the decision on Tuesday was sharp, causing it to sink to more than 150 yen to the dollar, a level that has previously prompted intervention from Japanese authorities.

On Tuesday, Japan's central bank ended its experiment with negative rates and unconventional easing tools, which aimed to reflate the world's fourth-largest economy.

The Bank of Japan made a decision just days after Rengo, Japan's largest federation of trade unions, announced that ongoing "shunto" wage negotiations between Japan Inc and unionized employees had resulted in a provisional weighted average 3.7% increase in base pay, which was even more robust than last year's gains, which were the steepest in three decades.

BOJ Governor Kazuo Ueda had repeatedly stated that these talks would be crucial to sustainable price increases, which would inform any decision to raise rates for the first time in 17 years. BOJ policymakers anticipate that higher salaries will result in a virtuous cycle, with domestic demand driving inflation.

Despite "core inflation" exceeding its 2% target for more than a year, the BOJ had barely budged from its ultra-loose monetary policy posture prior to Tuesday. Policymakers viewed that price increases were largely imported from overseas.

According to Rob Carnell, head of Asia Pacific research at ING, the BOJ has taken a risk in assuming that significant wage increases in many companies will lead to growth in household spending.

He warned that they are currently unaware of it.

The BOJ will now use its short-term interest rate as its primary policy tool. It will set an interest rate of 0.1% on current account balances held by financial institutions at the central bank from March 21, while keeping the uncollateralized overnight call rate at around 0 to 0.1% — effectively raising interest rates from -0.1% previously.

Following the BOJ announcement, Japan's largest banks, including Mitsubishi UFJ and Sumitomo Mitsui, declared they would increase interest rates on regular yen deposits.

There are some other highlights of its policy decision:

• The Bank of Japan announced that it would discontinue its yield curve control, which kept longer-term interest rates close to zero, and cease purchasing exchange-traded funds and Japan real estate investment trusts.
• The BOJ committed to gradually reducing its purchases of commercial paper and corporate bonds, with the goal of ending this practice within a year.
• If long-term interest rates rise rapidly, the Japanese government may increase its purchases of JGBs and fixed-rate JGBs as a nimble response.

CNBC takes a look at what could next happen:

Short-term market impact

The selloff in the Japanese yen following the decision on Tuesday was sharp, causing it to sink to more than 150 yen, a level that has previously prompted intervention from Japanese authorities.

Ueda stated at his post-decision press conference that a "rapid" pace of hikes is unlikely due to the fragile economic outlook for the economy, which may have disappointed some Japanese yen bulls, according to Michael Brown, senior research strategist at forex broker Pepperstone.

The BOJ stated that it does not plan to increase interest rates aggressively, as it expects to maintain accommodative financial conditions in the near future.

During the press conference on Tuesday, Ueda did not provide a specific timeline for reducing the BOJ's balance sheet or any indication of future rate hikes.

The Bank of America's global rates team predicts a "limited" immediate impact globally following the BOJ move, as the action is already well priced based on local Japanese news reports.

The BOJ's decision to scrap its yield curve control framework does not necessarily mean a sharp rise in yields on JGBs. The BOJ will continue to purchase government bonds worth "broadly the same amount" as before, which is currently about 6 trillion yen per month.

The BOJ may gradually reduce its JGB purchases based on the decrease in the upper bound of offer sizes, according to Barclays economists.

Longer-term concerns

One of the biggest fears is the extent of any repatriation to Japan.

Despite other global central banks tightening policy in the past year, decades of accommodative monetary policy in Japan have resulted in a concentration of carry trades in the Japanese yen due to the significant interest rate difference between Japan and other parts of the world, keeping the Japanese yen weak. Carry trades involve borrowing in a low-yielding currency to fund investments in higher-yielding assets elsewhere.

The traditional yen carry trade and the return of Japanese capital to its domestic bond market could lead to increased volatility. Japanese investors have been seeking better returns abroad due to low interest rates in their home market for several years.

If the BOJ does not hike rates aggressively, it seems unlikely that the spread between U.S. Treasurys and JGBs will drop significantly, as it currently exceeds 300 basis points, according to Vishnu Varathan, Mizuho's chief Asia ex-Japan economist.

"Although an unforeseen dovish turn by the U.S. Federal Reserve is a distinct possibility."

The Fed is due to announce its own interest rate decision on Wednesday.

Hayden Briscoe, head of APAC multi asset portfolio management at UBS Asset Management, stated that in the future, there will be a gradual increase in bond yields, with 25 or 50 point blocks to ensure market functioning.

Briscoe believes that the BOJ will not make significant changes to the benchmark interest rate quickly, as they are cautious about raising short rates too aggressively while long-term yields remain under pressure.

The BOJ may gradually increase the longer end of the yield curve and then raise cash rates if demand and prices increase due to higher wages.

Briscoe states that this move will not occur imminently.

The Bank of Japan's decision to slightly increase interest rates is not the main focus of the March or April meetings. Instead, we will pay attention to the overall policy shift and its impact on expectations for future rate hikes.

"Something big in Japan is about to happen," he added.

— CNBC's Shreyashi Sanyal contributed to this story.