well .. this is basically how a Foreign Key is supposed to work! A Foreign Key also is a CONSTRAINT. Data in the child table are constrainted to/restricted to being valid with data in the parent table.
A Foreign Key is an index where the index in being built with data from another table – You cannot use a NULL value is an Foreign Key. Also NULL is nothing – it is not zero! That is why you get the error 'Can't update …' – because there is nothing (that is what NULL means) to update with.
Further you define genre_id SMALLINT NOT NULL PRIMARY KEY and write and i leave the field genre_id blank (it can be null). Is not that a contracition?
I believe that you must define a certain value for album_id, artist_id and genre_id having the meaning of 'unknown/undecided'. That can be O (zero) -1 or anything.
I also hope you understand that the question(s) you are asking are not SQLyog-related questions – but general MySQL/database design/SQL questions. As such they should probably have been in 'MySQL Server' category. Just for perfectness! But that is OK 🙂
However there a other places to ask database design questions where you will probably get more response.
However Cal is here now I see …
