On a recent Google webmaster thread here, a Google employee wrote the following response to an IDN owner who was trying to develop his site:

“For us, domain names in Punycode are equivalent to their Unicode versions. In general, browsers prefer to show the real name, while internally using Punycode (as is required to access the site properly). This does not have an impact on a site’s PageRank (though as you mention, it appears that this might not be visible correctly in the Google Toolbar — I’ll pass that on to check out).

Content on IDNs can rank just as well as other domain names. We don’t treat them any differently. Sadly, there are still some legacy browsers that do not support IDNs properly, so if you do not see them in the search results, it might be that they’re just not as widely used yet.”

Though the IDN community is well aware that IDNs can be developed and will rank well in the search engines, it is nice to see Google affirm this publicly. And thankfully the old browsers that don’t properly support IDNs are in the process of being phased out.