Approach for Automating localized Web application in Selenium using Java Bindings
You're right that there is a problem managing the files, but you're also right that this is the best approach. Some things are just hard :-(
Selenium (at least the Selenium RC API) does indeed support Unicode input and output, we have lots of tests that enter and confirm Cyrillic and Simple Chinese characters from C#. Since Java strings are Unicode at the core (just like C#), I expect you could simply create the file in a UTF-8-friendly editor like Notepad++ and read them straight into strings and use them directly in the Selenium API.
a database would work better for many reasons, like growth, central location, kept outside of app and can be edited and maintained outside of app. We used a table with columns:
id (int) auto incrementid_text -- this and other columns are varchar ... except for date time for last 2langtranslationcreated_byupdated_bycreated_dateupdated_date
An id is a short english description of the text - like 'hello' or 'error1msg', the key in your map.
In java had a function to get the text for a particular text ... and a app level property - default language (usually en but good to keep it configurable)
Function would scan already loaded hashmap for language asked for - say "ch"
If corresponding translation was not found for this language we would return the default language translation and if that was not founf then we would return "[" + id "]" so the tester knows something is missing in data base - can go to web screen to edit translation table and add it.