First priority is launching PayPal Here dongle across Japan.
The two partners will each invest one billion yen ($12.5 million) in the project, called PayPal Japan. Hiroaki Kitano, an SVP at Softbank Mobile, is expected to become its CEO.
It's quite a coup for PayPal, which only unveiled the PayPal Here card processing dongle last month - after seeing rival Square close in on $1bn in annual transactions for its accessory.
Softbank said only 12 per cent of financial transactions in Japan are by credit card, and that there's still a huge cash economy.
Products like PayPal Here and Square make card payments accessible to cash-deopendent smaller traders by removing the need for costly POS readers. All they need is a dongle and a phone.
Softbank CEO Masayoshi Son said: "At large electronics stores and supermarkets, dozens line up at cash registers, and customers have to wait. This allows workers at such stores to settle purchases immediately with their smartphones.
"So I think it will be adapted at larger stores, not just smaller ones."
PayPal and Softbank will charge 1,200 yen for the dongle, and take a five per cent commission on all transactions. Japan will follow US, Canada, Hong Kong and Australia in launching PayPal Here.