The 25-year-old has made a swift return to the West Midlands after spending the past season and a half on loan at rivals Aston Villa.
Villa had hoped to make his loan move permanent this summer, but when financial crisis struck following their play-off final defeat, Albion swooped in.
The Baggies have been long-term admirers of Johnstone, and tried to sign him last summer before he returned to Villa Park on loan.
His arrival paves the way for Ben Foster’s exit to Watford, with the two clubs close to agreeing a fee of around £2.5m.
Johnstone, meanwhile, is keen to settle down after a number of loan spells during his time at United.
"I'm happy to be here,” said the keeper. “I've spoken to a lot of people about the club and heard nothing but good things.
"It's good to get through the door. I've played Championship games and won a promotion from League One with Preston but always seemed to end back at Manchester United or going somewhere else.
"Now it's time to settle down and take my game up to the next level which I believe I can do here."
Johnstone kept 22 clean sheets in the Championship last season, the second-highest amount in the division.
Born in Preston, he came through the United academy but never made a first-team appearance for the Red Devils.
However, he did enjoy loan spells at Oldham, Scunthorpe, Walsall, Yeovil, Doncaster, Preston, and Villa.
Albion also released next season's goalkeeper kit, which is all black, when they announced Johnstone's arrival.