Mutations in the small heterodimer partner gene (NR0B2; alias SHP) are associated with high birth weight and mild obesity in Japanese children. SHP mutations may also be associated with later obesity and insulin resistance syndrome that induces diabetes. To investigate this possibility, the prevalence of SHP mutations in Japanese with and without type 2 diabetes mellitus and the functional properties of the mutant proteins were evaluated. Direct sequencing of two exons and flanking sequences of SHP in 805 diabetic patients and 752 non‐diabetic controls identified 15 different mutations in 44 subjects, including 6 novel mutations. Functional analyses of the mutant proteins revealed significantly reduced activity of nine of the mutations. Mutations with reduced activity were found in 19 patients (2.4%) in the diabetic group and in 6 subjects (0.8%) in the control group. The frequency difference between DM and control subjects adjusted for sex and age was statistically significant (P=0.029, odds ratio 2.67, 95% CI 1.05–6.81, 1−β=0.91). We conclude that SHP mutations associated with mild obesity in childhood increase susceptibility to type 2 diabetes in later life in Japanese. © 2008 Wiley‐Liss, Inc.