During development, epithelial progenitors establish intercellular junctions, including tight junctions (TJs), and form three-dimensional (3D) tissue structures, which are often associated with luminal structures. Here we identify grainyhead-like 2 (Grhl2) as a transcription factor that regulates the size of luminal space surrounded by polarized epithelial cells. We show that HPPL, a liver progenitor cell line, transfected with Grhl2 cDNA forms remarkably larger cysts than the control cells in 3D cultures. We find that Grhl2 up-regulates claudin (Cldn) 3 and Cldn4, and their functions are necessary for the formation of large cysts. Overexpression of Cldn3 alone induces the cyst expansion. In contrast, expression of Cldn4 alone does not induce expansion, as it is not localized at TJs. Of interest, Rab25, another Grhl2 target, not only increases the Cldn4 protein, but also enhances its localization at TJs. Taken together, the results indicate that Grhl2 regulates epithelial morphogenesis through transcriptional up-regulation of Cldn3 and Cldn4, as well as of Rab25, which increases the Cldn4 protein and its localization at TJs. The results reveal a molecular network regulating epithelial lumen formation organized by Grhl2.