From the introduction:
Welcome traveller to Koholint Island! Koholint “exists” (in a loose sense of the word) in the same world as Hyrule, though Hyrule itself is a far-off land. The island, all of the people and animals living on it, are all part of the dream of a being known as the Wind Fish. However, all is not well here, as the Nightmares have infested the dream, keeping the Wind Fish asleep in order to rule the dreamworld. The villages and the people within them are relatively safe, for the time being, but who knows how long that will last?