Accumulation of misfolded proteins in the endoplasmic reticulum (ER) induces the unfolded protein response (UPR), which alleviates protein overload in the secretory pathway. Although the UPR is activated under diverse pathological conditions, its physiological role during development and in adulthood has not been fully elucidated. Binding immunoglobulin protein (BiP) is an ER chaperone, which is central to ER function. We produced knock-in mice expressing a mutant BiP lacking the retrieval sequence to cause a defect in ER function without completely eliminating BiP. In embryonic fibroblasts, the UPR compensated for mutation of BiP. However, neonates expressing mutant BiP suffered respiratory failure due to impaired secretion of pulmonary surfactant by alveolar type II epithelial cells. Expression of surfactant protein (SP)-C was reduced and the lamellar body was malformed, indicating that BiP plays a critical role in the biosynthesis of pulmonary surfactant. Because pulmonary surfactant requires extensive post-translational processing in the secretory pathway, these findings suggest that in secretory cells, such as alveolar type II cells, the UPR is essential for managing the normal physiological ER protein overload that occurs during development. Moreover, failure of this adaptive mechanism may increase pulmonary susceptibility to environmental insults, such as hypoxia and ischemia, ultimately leading to neonatal respiratory failure.