Tokyo's Nikkei share average rose more than 400 points on Thursday, or 2.62%, to close at 16,036.91 - its highest one-day percentage gain since 21 Febuary.
Toshihiko Fukui, the bank's governor, announced an end to a five-year experiment with ultra-loose monetary policy and said they would return to a conventional interest rate regime, but would hold short-term rates near zero.
The announcement reflects the central bank's confidence that Japan has finally beaten a deflationary spiral which triggered the monetary policy that kept interest rates near zero for most of the last seven years.
Economists praised the move as shrewd and balanced, saying the Bank of Japan was careful to take timely action without alarming global markets that had grown jittery in recent weeks about a possible policy change, which made it easy to borrow money in Japan practically interest-free.
Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo, said: "The bank did a splendid job. The market had expected an end to the policy, but the bank still left interest rate rises open to interpretation."
With the US Federal Reserve and the European Central Bank already increasing rates, money around the world is more expensive and less liquid, prompting investors to switch funds out of some commodities and riskier emerging market assets such as Turkish stocks and the Icelandic crown.
"It's unambiguously good news for Japan. It signals the dark days of deflation are behind us"
Glenn Maguire, chief economist, Societe Generale
Alan Ruskin, chief international strategist at RBS Greenwich Capital, said: "There's a sense that the world is changing, no question. But it's the size of the change that matters."
Most analysts expect a Japanese rate rise later this year.
Glenn Maguire, chief economist at Societe Generale in Hong Kong, said he expects the bank to hold off until December, but said the bank's decision had been more aggressive and bold than most economists had expected.
"It's unambiguously good news for Japan. It signals the dark days of deflation are behind us," Maguire said.