Although the Hippo-Yap pathway has been implicated in lung development, the specific roles for Yap and its nucleocytoplasmic shuttling in the developing airway and alveolar compartments remain elusive. Moreover, conflicting results from expression studies and differences in Yap and Hippo kinases lung phenotypes raised controversies about the dynamics and significance of Yap subcellular localization in the developing lung. Here we show that the aberrant morphogenesis of Yap-deficient lungs results from the disruption of developmental events specifically in distal epithelial progenitors. We show that activation of nuclear Yap is enough to fulfill the Yap requirements to rescue the lung abnormalities in these mutants. Remarkably, we found that Yap nucleocytoplasmic shuttling is largely dispensable in epithelial progenitors for both branching morphogenesis and sacculation. However, if maintained transcriptionally active in airways, nuclear Yap profoundly alters proximal-distal identity and halts epithelial differentiation. Altogether these observations provide novel insights into the crucial importance of Hippo-Yap signaling in the lung prenatally.