Ok, some more to this.
It turns out dash's built-in echo command interprets \nnn octal
sequences by default, and there's no way to turn that off. So,
for example, sed-zoffset command from arch/x86/boot/Makefile
(which includes \1 \2 etc substitutions for sed), when echoed
in verbose mode (V=1), produces.. interesting characters (with
ascii code 1 and 2).
It's not practival to replace V=1's echo with /bin/echo I think.
So I'd say it's not a bug in the build system after all, but
a bug in dash. Well, at least this expanding-by-default didn't
trigger another very-difficult-to-find bug (hopefully), but it
has good potential.
I'll file a bug report against dash.
/mjt