It is a sensational upset given that the Japanese was seeded eight for the singles competition and was expected to meet Lee Chong Wei in the last eight.
Tago, who was a Malaysian Open finalist in january had no answer to a sterling display by a player ranked 39 places below him.
"I just do not know what happened. I am perfectly okay mentally and physically. I am sorry for my family and supporters and need to sort things out in my head," admitted Tago.
For Karunaratne who was the Sri Lankan flag bearer at the opening ceremony, the win was a pleasant surprise.
"The crowd was fantastic and kept urging me on. It is really great to win the match and I just kept attacking as my opponent was under pressure to win while I had nothing to lose," said Karunaratne who could end up playing Chong Wei if he gets past either Kashyap Parupalli of India or Nguyen Tien Minh of Vietnam.