Nissan's chairman is to be fired after the firm said an internal probe found he under-reported his income by millions of pounds and engaged in other "significant misconduct".
According to NHK and the Kyodo News Service, Nissan paid Ghosn almost 10 billion yen ($89 million) over five years through March 2015, including salary and other income, but he reported receiving only about half that amount.
"The Tokyo District Public Prosecutor's Office arrested Nissan chairman Ghosn on suspicion of violation of the Financial Instruments and Exchange Act", Japan's public broadcaster NHK said.
"By under-reporting his corporate salary, he basically deprived Nissan's shareholders of opportunities to judge if the amount of his salary was appropriate", Toru Ibayashi, executive director of Wealth Management at UBS Securities Japan, said of Nissan's allegations.
Mr Ghosn is also in charge of the Renault Nissan Mitsubishi alliance - the world's biggest car-selling group.
Brazilian-born, of Lebanese descent and a French citizen, Ghosn began his career in 1978 at tyremaker Michelin, before moving to Renault in 1996, where he oversaw a turnaround at the French automaker that won him the nickname 'Le Cost Killer'. In 2016, Ghosn became Mitsubishi Motors' chairman.
Speaking at Nissan's headquarters in Yokohama, Saikawa said the company's management will focus on minimising the impact of the shake-up on the company and its employees.
As far as Nissan's relationship with Renault and Mitsubishi goes, Saikawa said it would not be affected by Ghosn's arrest.
The fact that Ghosn and Mitsubishi Motors CEO Osamu Masuko were close allies also helped form the partnership.
Companies in the alliance own parts of each other and share investments in new technologies, among other things.
Shares in Renault, where Ghosn is CEO, plunged as much as 13% in Paris.
In the hours after news broke of Ghosn's alleged behaviour, both Nissan and Renault reaffirmed their commitment to the carmaking venture.
Nissan's CEO Hiroto Saikawa said he would propose to the company's board that Ghosn and Kelly be removed from their positions at a meeting scheduled for Thursday.
In 2016, Ghosn also took control of Mitsubishi, after Nissan bought a one-third stake in the company, following Mitsubishi's mileage-cheating scandal.
Known as an aggressive cost-cutter, he was appointed chief operating officer of Nissan in 1999 and became president the following year.
Mr Saikawa, in a 90-minute news conference late on Monday, said the company was overdue for some change and that power had been too heavily concentrated in one person.