^THIS! I agree with your first paragraph, though not completely.
I think that it is made quite obvious by the devs that those games are not canon. I mean, they throw the entire story, all the consequences, and implications to the garbage can. How else would you interpret that? Klonoa appears to not recall any of the painful emotions while reuniting with Huepow. He just rolls with it. Ha ha!
I'm just going to cite a part of the interview with Hideo Yoshizawa, and write a couple of my thoughts about the subject of this thread:
"I remember playing Klonoa on the PS1 and all the way at the end the game was very sad. Actually, Klonoa 2 was pretty sad too. How come Klonoa has such tearful endings?
At that time there were a lot of movie-like games were being made. I started to wonder if it were possible to make a story that could only be told in a game. As I thought about this, the idea of the game's opening and ending suddenly struck me.
The story of Klonoa is structured like a fairy tale. There is the basic story that is fun for anyone, but there is also a deeper meaning behind it for adults to think about as well.
I also think that the sad ending of Klonoa could be a metaphor for how you feel after finishing a good game."
I think that the game ending can be a metaphor for how you feel after finishing a good novel, movie, TV series (although good and TV series appears to be an oxymoron), you name it...
You emerge into a word that you don't really belong to as Klonoa doesn't belong to Phantomile. You feel as if the, for the lack of a better word, alien (I hate how this word sounds, and also don't want to plagiarize Shiroemon style) beings made of the bitter smelling ink, or rather bits nowadays, have become your well known friends. But, in reality it is a delusion; as Klonoa was deluded by Huepow. In the end, as the protagonist of our beloved games we don't care if it is a delusion. We don't want to leave; we don't want to see that pesky, blank page at the end of the book. As Klonoa digs his nails into the ground we do the same. We don't want to leave the phantasy and move on. Life has no climax, life has no ending. You always have to move on...
Source:
http://www.siliconera.com/2009/03/20/klonoa-now-and-then-hideo-yoshizawa-returns-to-phantomile/