Kaguya is the main antagonist in the third Inuyasha movie, "Castle Beyond the Looking Glass."

Kaguya is a so-called fallen angel (it is never specified if she is truly an angel, or a mere demon who thinks she is) who desires the Celestial Robe, which can make her immortal. However, long ago Kaguya was sealed away in a mirror that seems similar to Kanna's. Following orders from the recently deceased Naraku, Kagura, and Kanna go on a quest to collect 5 magical items, one of which is a scrap of InuYasha's robe. It is also during the collection of the 5th item that Kagome is captured.

Upon collecting the items, 5 beams of light create a pentagram over Japan, freeing Kaguya. InuYasha races to Kaguya's castle with Shippo, Sango, Kohaku and Miroku lagging behind. Kaguya uses the mirror she was previously sealed in to seal InuYasha's human side, unleashing his full demon side. Kagome, in a desperate attempt to stop the transformation, Kagome kisses him, cracking Kaguya's mirror and breaking the spell. At this point, Sango and the others arrive to witness the couple's first kiss. Kanna then uses her own mirror and steals some of Kaguya's life force. At this point, a spider mark appears on Kohaku's back, and Naraku emerges, apparently not as dead as InuYasha and company would have hoped. Kohaku once again reverts back to Naraku's control, and Miroku regains his Wind Tunnel.

The castle starts to collapse, and InuYasha and the gang flee. Kaguya chases them as a black cloud, determined to kill them. However, Miroku uses his Wind Tunnel to absorb Kaguya. Everyone, including Naraku, escapes the castle unharmed.

Kaguya is supposedly the girl Kaguya-hime, a girl from a commonly known Japanese legend known as the Legend of the Bamboo Cutter. Again, it is not truly specified if Kaguya is actually Kaguya-hime, or merely believes herself to be. In the legend, five princes ask for Kaguya-hime's hand in marriage. Not planning to marry any of them, Kaguya-hime sends each of them on a quest to retrieve five treasures- the basin of Buddha, a silver and gold alzalea, the Chinese Fire mouse (or fire rat, as in InuYasha's robe), a colored dragon jewel, and the seashore treasure of the swallows.

All the princes fail their task, and thus fail to win Kaguya-hime's favor. In the movie, these treasures are the key to releasing Kaguya from her mirror. They also represent wood, earth, fire, metal and water. In the movie, Kaguya desires the Celestial robe to gain the power of a celestial being in order to return to the moon. In the actual legend, Kaguya-hime returns to the moon after a set amount of time, claiming her time on earth was merely punishment for an unknown crime.

(Source: Absolute Anime)