--- a/term.el	2014-07-16 19:22:09.348823919 +0200
+++ b/term.el	2014-07-16 21:30:28.272894153 +0200
@@ -3424,7 +3424,8 @@
 			   (substring string (1+ first-colon) second-colon))))
 	   (setq term-pending-frame (cons filename fileline))))
 	((= (aref string 0) ?/)
-	 (cd (substring string 1)))
+	 (cd (decode-coding-string (substring string 1)
+                                   locale-coding-system)))
 	;; Allowing the inferior to call functions in Emacs is
 	;; probably too big a security hole.
 	;; ((= (aref string 0) ?!)