Looking more closely at the code, I've realised Victor's right - there's no way for Py_DecodeLocale() to accidentally trigger an attempt to import the "encodings" module.

Instead, the error is likely coming from the init_sys_streams step towards the end of the initialization process. The way the embedded test cases are currently being run unfortunately truncated that traceback.

Rather than trying to improve the test case error reporting under the scope of this issue, I've instead filed https://bugs.python.org/issue32136 to cover factoring the runtime embedding tests out to their own test file.