Fortune smiles on Inuyasha and his allies when they finally defeat their nemesis Naraku, who has caused them unrelenting hardships. Overjoyed by the long-awaited victory, they all hurry to resume their former lives, unaware that danger still lurks around. Kanna and Kagura, two of Naraku's subordinates, make arrangements to set free a sealed demonic entity that claims to be Kaguya, the legendary Princess of the Heavens.

Although preoccupied with their own endeavors, Inuyasha's group members reunite by a string of unusual coincidences involving Kanna and Kagura along with an inexplicable phenomenon of repeated full-moon nights. Upon realizing that Kaguya is behind the troubling events and that she holds a terrible power, they join forces once more to stop the disastrous fate she has planned for the world.

InuYasha Movie 2: Kagami no Naka no Mugenjou premiered between the release of the TV series' episodes 95 and 96. The movie features a character named Kaguya, who is based on the Japanese folklore narrative The Tale of the Bamboo Cutter.

In Japan, there were two DVD releases: one on August 21, 2003 and another on November 26, 2004. The first included a bonus radio drama audio CD while the second was a standard edition single disc. The DVD English version was made available by Viz Media on December 28, 2004.