We previously reported that transcription factor XBP1S binds to RUNX2 and enhances chondrocyte hypertrophy through acting as a cofactor of RUNX2. Herein, we report that XBP1S is a key downstream molecule of BMP2 and is required for BMP2-mediated chondrocyte differentiation. XBP1S is up-regulated during chondrocyte differentiation and demonstrates the temporal and spatial expression pattern during skeletal development. XBP1S stimulates chondrocyte differentiation from mesenchymal stem cells in vitro and endochondral ossification ex vivo. In addition, XBP1S activates granulin-epithelin precursor (GEP), a growth factor known to stimulate chondrogenesis, and endogenous GEP is required, at least in part, for XBP1S-stimulated chondrocyte hypertrophy, mineralization and endochondral bone formation. Furthermore, XBP1S enhances GEP-stimulated chondrogenesis and endochondral bone formation. Collectively, these findings demonstrate that XBP1S, a BMP2-inducible transcription factor, positively regulates endochondral bone formation by activating GEP chondrogenic growth factor.