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A year ago, I would have said go with unaltered Japanese characters for its SEO benefits but now I think it might be a matter of preference.
I experimented with Japanese url paths about a year ago after suspecting that having unaltered Japanese characters in the URL was helpful in yahoo ranking. Large players like Amazon Japan started including Japanese characters in their URL for search engine benefits about the same time. (here is the japanese article). At the time, I found that it generally helped with rankings.
As an example, if you searched 'ビリーズ ブートキャンプ' on yahoo last year, almost all the top 10 results were either Japanese domains or had url paths with unaltered Japanese characters. You do the same search today and wikipedia is the only domain that returns Japanese characters.
Things changed when yahoo Japan made an algo change (think it was the end of last year). They made the change probably because were too many MFA (made for adsense) and spammy sites that took advantage of having Japanese characters in the url path. (*Note this is all based on my experience and is speculation).
So in terms of a SEO advantage, in my opinion, having Japanese characters in the URL was effective. Today, it probably won't make that big of a difference.
That being said, I still use Japanese characters in my url at times. I recently developed a site using mediawiki and found that I really couldn't avoid it because it passes the title variable in the url.
However, for stuff that I build from scratch, most of the time I try to keep it my URLs as short, clean and readable so I end up using numbers. So www.something.com/category/12 instead of www.something.com/category/%E3%83%93%E3%83%87%E3%82%AA. I think this much easier on the eyes and less to work with if someone wants to link to my page.
Not sure if that helps at all but those are just my ideas on this subject.
I was surprised to see that Firefox 3 actually renders any UTF-8 escaped bits in the URL as regular chars in the browser's address and status bar. Kind of jarring in a way, but nice.
Brooke: But hey! I was surprised to see that Firefox 3 actually renders any UTF-8 escaped bits in the URL as regular chars in the browser's address and status bar. Kind of jarring in a way, but nice. Wonder of IE7 (I still don't want to upgrade) can do that?
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