It's similar to

print ++($foo = 98)
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which returns 99. Similarly, in "Zy", it first tries to increment from the right, and y -> z is a valid increment which finishes the operation.

The next word would be AAa, because "z" goes to "a" with a "carry flag", so we need to increment "Z", which goes to "A" with a carry flag, and as there's nothing else to increment to the left, we add "A" (the case is copied from the previous letter).

Wrap means "to start the round from the beginning again" here.