Carlos Ghosn, one of the world's most influential executives is under arrest, in a shocking turn of events that raises questions about the future of the sprawling Franco-Japanese auto group he leads.
Nissan said it was providing information to the prosecutors and cooperating with their investigation.
Brazilian-born, of Lebanese descent and a French citizen, Mr Ghosn began his career at Michelin in France, moving to Renault.
Nissan said Ghosn's wrongdoing and Kelly's "deep involvement" were uncovered by an internal investigation conducted over the past several months following a whistleblower report.
"Beyond being sorry I feel great disappointment, frustration, despair, indignation and resentment", Saikawa said, apologizing for a full seven minutes at the outset of a news conference.
Japanese prosecutors also said they had already raided Nissan's Yokohama headquarters, near Tokyo, as part of their investigation.
While there could be some scrutiny of the relationships between the companies, they're so intertwined now that cutting them apart would be hard, said Kelley Blue Book analyst Michelle Krebs. "This is serious misconduct".
He is being questioned on allegations he under-reported his income to the authorities and misused company funds.
"He achieved much that many others could not do in reforms, especially in the beginning", he said.
He promised to beef up corporate governance, adding that the problems may have happened because too much power was focused in one person.
"We need to really look back at what happened, take it seriously and take fundamental countermeasures", he said.
Public broadcaster NHK said Nissan paid billions of yen to buy and renovate homes for Ghosn in Rio, Beirut, Paris and Amsterdam, citing unnamed sources. The properties had no business objective and were not listed as benefits in filings to the Tokyo bourse, NHK said.
But experts said it is unlikely he will be able to stay on there or at Renault, where he is also chief executive. Renault said its board would hold an emergency meeting Tuesday in response to his arrest. Renault owns 43% of Nissan, which owns 15% of Renault and 34% of Mitsubishi.
In the hours after news broke of Ghosn's alleged behaviour, both Nissan and Renault reaffirmed their commitment to the carmaking venture.
In February he was forced to accept a 30 percent pay cut from the 7.25 million euros ($11.4 million AUD) he took home as Renault CEO past year. His compensation, high by Japanese standards, has been a source of controversy over the years.
Nissan earlier said: "The investigation showed that over many years both Ghosn and Kelly have been reporting compensation amounts in the Tokyo Stock Exchange securities report that were less than the actual amount, to reduce the disclosed amount of Carlos Ghosn's compensation".
He is admired for driving a turnaround at Nissan when it was near bankruptcy and for his foresight in pushing to bring electric and autonomous cars to the masses. His subsequent decision to close a Renault factory, which sparked protests in France, earned him the nickname "le cost killer" in the local press.
At Renault, his package for 2017 was narrowly passed by shareholders, but only after he agreed to a 20 per cent reduction.
That angered then-President Francois Hollande. Hollande's socialist government imposed limits on executive pay at state-run companies and tried to do the same in the private sector but backed down amid concerns that it would scare away foreign investment. In addition, he received €9.2m in his final year as Nissan chief executive. He became chief executive of Renault in 2005, leading the two major automakers simultaneously.
Seiji Sugiura, a senior analyst at Tokai Tokyo Research Institute, said the path forward remains unclear, as Ghosn may deny the allegations.