Kaguya Hime is a character from a very famous Japanese folk story called Taketori Monogatari (竹取物語), "The Tale of the Bamboo Cutter." She was found by a Bamboo cutter inside a stalk of Bamboo. The cutter raised her as his own daughter and she became very renowned throughout Japan for her beauty. Many men came to ask for her hand in marriage but she refused them all. Eventually the Emperor of Japan also heard of her beauty and desired to marry her. She refused him as well, however, he still continued to love her even though they never married.
Eventually it was revealed that she was from a group of celestial people who lived on the moon. They came to take her back, and when the Emperor heard this he sent guards to protect her. They were unable to stop the Celestial messengers, but before Kaguya left for the moon she gave a small portion of the Elixir of Life to the Emperor so that if he drank it he might live forever. The Emperor decided he did not want to live forever without her so he ordered a messenger to take the elixir to the top of the highest mountain in the land and burn it. This mountain was Mt. Fuji and it is believed to be a possible cause for the name of the mountain. In different kanji 不死 can be read as "Fushi" or "Fuji" which would mean "immortal." However the kanji used today for the mountain are different, (富士）.
Kaguya is summoned by Yu Narukami during the final battle against Izanami-no-Okami, representing the bond between Yu and Marie. All of Izanami's attacks pass through her body and Kaguya is the one who defeats Izanami-no-Okami, replacing Izanagi-no-Okami's role from the original game.