Rationale: Transcriptional coactivator with PDZ-binding motif (TAZ) is assumed to act as a coactivator of several transcription factors including smad2/3. In the lung, surfactant protein C (Sftpc) is known to be a downstream target of thyroid transcription factor-1 (TTF-1) -TAZ transcriptional coactivation. Objectives: The lung phenotype of Taz-deficient mice was explored. Methods: Taz-deficient mice were analyzed pathologically and physiologically. Next, we performed microarray analysis in order to determine the genes closely related to abnormal lung development. Finally, Taz heterozygous mice were injected with bleomycin Measurements and Main Results: Taz-deficient homozygotes showed abnormal alveolarization during lung development, which caused in adult mice airspace enlargement mimicking emphysema. There was no significant difference in the expression of Sftpc between wild-type and Taz-deficient lungs. Instead, microarray analysis identified some candidate downstream genes related to the pathogenesis, including the connective tissue growth factor (Ctgf) gene, which is required for normal lung development. In vitro studies showed that TAZ up-regulated Ctgf expression by not only reinforcing TGF-smads signals, but also interfering more proximal Ctgf promoter region (from -123bp to -76bp), defined as TAZ response element. Furthermore, Taz heterozygous mice were resistant to bleomycin-induced lung fibrosis. Conclusions: The results indicate the importance of TAZ in lung alveolarization and its involvement in the pathogenesis of lung fibrosis.