The only reason I call them cats is because of a quote from the Wiki:"There is much speculation as to what Klonoa actually is, though he most closely resembles a rabbit, cat or dog. The latter is probably the most fitting description, as Namco has stated in various interviews that though he is primarily a fantasy character, they mostly consider him a cat with long ears."
Since his proposed redesign for the Wiimake had him with catlike ears, I mostly envision that the residents of Breezegale have cat ears, but grow out the fur on them, similarly to the Caracal species, but to an extreme:
which makes sense to me seeing as Balue has the ends of his ears tied, it would make more sense if it was just extra fur
EDIT: Similarly, I think this because of a piece of animation in DTP:
Showing that there is some kind of disconnection half way through the ear, most likely where the tip of the ear ends, and the extra fur begins, as I've pathetically attempted to illustrate