The England international moves to Molineux for a fee of £10m.
Wolves sporting director Matt Hobbs said: “It's great for us to have a player with a huge amount of Premier League experience and an international goalkeeper.
"It's finding the right balance between the level of investment, what it adds to the squad and what it enables us to do for the rest of the squad."
Johnstone said, “I’m absolutely buzzing. I’m finally here, excited to get going and I can't wait to put on the shirt.
“I've got good memories from this area, so it's nice to be back up north. Don't get me wrong, I really enjoyed it down south, it was a different adventure for me and my family, but being back up north, it is home, and I’m glad to be here in front of the Wolves fans.
“It's a massive club, from the outside looking in, it's a really good club, and I've noticed that for the first two days being here. I've also worked with Neil Cutler – the goalie coach – before, who I love working with, and it's time to keep going, keep improving, and play football.”