Worked this out, what I missed is that the localization path is hardcoded in the staging code here:
foreach (string Culture in CulturesToStage)
{
SC.StageFiles(StagedFileType.UFS, CombinePaths(SC.ProjectRoot, "Content/Localization/Game", Culture), "*.locres", true, null, CombinePaths(SC.RelativeProjectRootForStage, "Content/Localization/Game", Culture), true, !Params.UsePak(SC.StageTargetPlatform));
}
So I changed all our settings to go back to that path and it works all fine