M-%). When entering the string to replace or the replacement string, you can enter a character using its octal code either of these ways:
The same possibilities exist for inserting a character to search for during Isearch.
But be aware that octal 344 IS ä - they are exactly the same character. So I expect that you are asking the wrong question.
It's possible that your buffer is in unibyte mode or its encoding or current font does not let the normal glyph (e.g. ä) for the character be displayed, so it is displayed instead using octal escape syntax (e.g. \344).
(It is unlikely that you have a unibyte buffer. But to ensure that your it is not unibyte, set buffer-local variable
t. See (elisp) Disabling Multibyte for how to tell if your buffer is unibyte.)
(ASCII control characters, such as CONTROL A, are also displayed as octal escapes, if variable
nil. But that is irrelevant for the characters you are asking about - they are not ASCII control characters.)