Sugai, who began the week as a virtual unknown, carded a pair of 67s to build a four-stroke lead heading into the weekend. He increased his advantage to six strokes after shooting a 2-over 73 in difficult conditions on Saturday, then closed with a 3-over 74 to finish two shots ahead of Canada's John Irwin.
'This feels unbelievable,' said Sugai after posting a 3-under-par total of 281. 'This tournament is a major, so to win it is incredible.'
He was the first wire-to-wire winner of the Senior British Open since Gary Player led from start to finish at Turnberry in 1988.
Ireland's Christy O'Connor, Jr., the 1999 and 2000 champ who missed last year's event due to a broken ankle, shot a 1-under 70 to finish alone in third place at 2-over-par 286.
John Chillas of Scotland shot a 72 to finish fourth at plus 3.
Pre-tournament favorite Tom Watson was five off the pace after two rounds but bogeyed four of the first six holes Saturday en route to a 5-over 76. Things went from bad to worse for Watson on Sunday, as the five-time British Open winner struggled to a 9-over 44 on the front side and wound up taking an 8-over 79. He finished in a tie for 14th at 10-over 294.
Any hopes Watson had for a final-round comeback were dashed when he needed three shots to get out a bunker at the par-4 second. He carded a triple-bogey on the hole, then went on to bogey the fourth, fifth, seventh and eighth holes before taking a double-bogey-6 at the ninth.
Watson managed to make a brave finish with three birdies against two bogeys on the inward nine for a 1-under 35.
Sugai actually stretched his lead to seven shots early Sunday with a birdie at the first. However, he followed a bogey at the seventh with a double-bogey at the eighth - the second time in as many days he recorded a 6 at the 425-yard par-4 - to slip to 4-under.
Meanwhile Irwin, playing in the final group with Sugai, suffered back-to-back bogeys just before the turn and dropped to 1-over, five off the lead.
Sugai and Irwin traded birdies at the 12th and 13th, then matched bogeys at 14 to keep the margin at five strokes. But Irwin quickly cut his deficit to two with birdies at the 16th and 17th coupled with Sugai's bogey at 17.
Although Sugai bogeyed the par-5 home hole, so did Irwin. The Canadian turned in a final-round 70 for the runner-up spot at 1-under 283.
Sugai, a four-time champion on the Japan Golf Tour and the winner of three titles on the Japan Seniors Tour, was proud of his ability to battle the long odds and the elements down the stretch.
'I felt very nervous all day but I managed to keep going,' said Sugai, who has a Japanese father and a Russian mother. 'I fight, fight, fight and it worked.'
Two other Japanese players, Seiji Ebihara and Katzunari Takahashi, tied for fifth place with New Zealand's Barry Vivian at 5-over-par 289.
Australian Ian Stanley, the 2001 champion, ended his title defense with a 3-over 74 for a share of 31st place at 15-over 299.
Arthur Pierse of Ireland was awarded the Silver Medal as the leading amateur for the second year in a row. He secured the honor Friday when he was the only non-professional to make the 36-hole cut.
Final results from the Senior British Open