Differentiation of epithelial cells and morphogenesis of epithelial tubes or layers is closely linked with the establishment and remodeling of the apical junctional complex, which includes adherens junctions and tight junctions. Little is known about the transcriptional control of apical junctional complex components. Here, we show that the transcription factor grainyhead-like 2 (Grhl2), an epithelium-specific mammalian homolog of Drosophila Grainyhead, is essential for adequate expression of the adherens junction gene E-cadherin and the tight junction gene claudin 4 (Cldn4) in several types of epithelia, including gut endoderm, surface ectoderm and otic epithelium. We have generated Grhl2 mutant mice to demonstrate defective molecular composition of the apical junctional complex in these compartments that coincides with the occurrence of anterior and posterior neural tube defects. Mechanistically, we show that Grhl2 specifically associates with cis-regulatory elements localized at the Cldn4 core promoter and within intron 2 of the E-cadherin gene. Cldn4 promoter activity in epithelial cells is crucially dependent on the availability of Grhl2 and on the integrity of the Grhl2-associated cis-regulatory element. At the E-cadherin locus, the intronic Grhl2-associated cis-regulatory region contacts the promoter via chromatin looping, while loss of Grhl2 leads to a specific decrease of activating histone marks at the E-cadherin promoter. Together, our data provide evidence that Grhl2 acts as a target gene-associated transcriptional activator of apical junctional complex components and, thereby, crucially participates in epithelial differentiation.