I did a quick google and encephalitis can be caused by viruses, including from mosquito bites and through the gastrointestinal tract (from something they ate.) Apparently cat poop is bad too. My girl doesn't eat dog poop but one time we were at a house with a cat and she went after the cat poo. I think cat poo is tasty to other animals. Maybe she ate cat poo?

I saw this (below), I think it's about people but I'm sure it applies. Hopefully it's just a pesky virus that caused it and it will go away and never come back.
Toxoplasmosis. Encephalitis from toxoplasmosis, which can be transmitted through a cat's feces or by eating contaminated food, rivals herpes as the most common infectious cause of encephalitis
Raccoon Roundworm. Raccoon roundworm (Baylisascaris procyonis) is a large parasitic worm that lives in the intestines of raccoons. Humans usually become infected by ingesting the worm's eggs through accidental contact with soil, wood chips, or tree bark contaminated with raccoon feces.

Encephalitis may be caused by other parasitic infections, such as toxocariasis (from roundworms found in dogs and cats) or cysticercosi (from food or water contaminated with pork tapeworm eggs). These infections usually cause only chills, fever, and swelling of lymph nodes, though seizures and headaches can occur

Update
 

Hi again.

I'm just updating the forum in the hope this will help someone one day.

Its now been 2.5 years since shes was at her worst. Despite the advice of the vet to put her down this dog does now quit and is not 4 years old.

Shes been getting gradually better over this time period.

She is off the pill that she had been prescribed and now only on 1.25cc of cortisone injected orally daily.

She weighs 5 pounds now which is a lot closer to her brothers and sisters.

Shes gotten stronger and her hair has darkened from a off white to a gray black. Shes grew as well, is now taller and longer and filled in well.

I consider myself extremely fortunate to have this yorkie in my life, my spouse is equally pleased that we did not take the vets advice.

It was hard at first but now its all worth it. Ive noticed that she is prone to heat exhaustion so I tend not to walk her on hot days and if I do I make sure to bring water for drinking and to soak her in.

Also very sensitive to any kind of head trauma, if she falls and hits her head or runs into something . This usually is followed by 1 day of being slow and sleepy but then she stabilizes and is fine.

Thanks so much for a such a wonderful update! I'm so happy you stuck by this precious one and helped her get better. What a great success story. :)

that is a success, good deal