Yes...that is how I understand it as well. The dancing, when in the creating period--it isn't
that old (relatively)--was to appease the souls of those ancestors who came back at Obon. Of course
Shinto festivals were in place at this general period as well and it just kind of matched in a way.
Now, the dancing is more of a cultural thing that an overtly religious thing. It is also a time and reason for drinking and making merry--which never miss to do at that time.
Here in Matsumoto, we have a fairly big street Bon dance--the Matsumoto Bon Bon--with its own song and music. There are usually some 30 large groups of dancers, usually made up of company employees or public service institutions which make their way around a set-out pattern of 'closed-to-traffic' streets on the early evening of the first Saturday in August of each year.
The number of people who come to see it from outside of Nagano, seems to be fairly large too. I have seen it three times, and kind of danced along with it once...but too many people, so I don't these days. (plus, less crazy than what I used to be...)