Inuyasha has mastered the ultimate attack of the Tetsusaiga and continues his battle for the Shikon Jewel shards with Kagome, Shippo, Sango, and Miroku. Unfortunately, a freak occurrence with a jewel shard has brought to life an incarnation of a demonic enemy sealed by Inuyasha's father. Inuyasha must surpass his father and destroy this demon, or every soul in Japan will be consumed.

Inuyasha and company start out battling Naraku. Then each person goes their separate ways: Sango going to find her younger brother Kohaku, Miroku goes back to his old home, and Inuyasha, Kagome and Shippo go to find the rest of the Shikon shards.

Unfortunately this peaceful interlude doesn't last. Shortly afterward, the full moon rises, and just keeps rising each night bringing with it the promise of danger. Kagura and Kanna go in search of a mirror, where, locked inside, is the ruler of the eternal night, Kaguya. To set her free they must gather five items and drop them into the five lakes of Fuji. Setting her free means danger for Inuyasha and the others, who are forced to face this new threat.

Inuyasha and Sesshomaru's father actually had three swords, known as the Swords of World Conquest. Tetsusaiga is the Sword of Earth and can kill one hundred demons in a single blow. Tenseiga is the Sword of Heaven and can save one hundred humans in one swing. Sou'unga is the sword that dominates this story and puts Inuyasha, his friends and even the entire world, in peril. Can Inuyasha and Sesshomaru team up, for once, and defeat this new nemesis?

A mysterious island appears where humans and demons live peacefully. Inuyasha went there with Kikyo once 50 years ago, and now returns with Kagome. A mysterious girl named Ai recognizes Inuyasha and has remained unchanged. However, when strange marks appear on the backs of Inuyasha and Sesshomaru, they are forced into a battle in which they can't avoid or stop!