Why they did this will be a question I ask myself everytime I boot up my PS5 once I get one...
I've ranted about this in detail ever since getting a PS5, but it seems like the issue is that, opposed to how (most) games worked on the PS4, where the icon was tied to the SKU you had (i.e. Japanese SKU = Japanese Icon, non-greatest hits SKU = non-greatest hits icon), it seems like now regardless of what version or region of a game you have, it just pulls from whatever the latest icon happens to be for the language your console is set to. This is made extra-worse for series that only have some localised games, but not others.
A very easy-to-see example of this is Yakuza. I own each game physically, in the Japanese SKU. Despite this, they display as:
Ryu Ga Gotoku Kiwami -> Yakuza Kiwami
Ryu Ga Gotoku Ishin -> Ryu Ga Gotoku Ishin (since it never came out in English)
Ryu Ga Gotoku 3 Remaster -> Ryu Ga Gotoku 3 Remaster (Because the independent physical SKU of 3/4/5 doesn't exist in international markets)
On top of this, some games in the dashboard have titles display in text, and others display in fancy icons. This also breaks, as seen when I insert my copy of Shin Sangoku Musou 8 (Dynasty Warriors 9). The title is displayed as the English version regardless of what language I set my system to, as it is an image rather than text (presumably).
Similarly, games that have not
yet released in English-speaking markets will sometimes display the Chinese/Asia icon, though this is pretty inconsistent:
とある魔術のバーチャロン (A Certain Magical Virtual-On) -> 魔法電腦戰機 (Magic Virtual-On)
真女神転生III REMASTER (Shin Megami Tensei III Nocturne HD) -> 真女神轉生III REMASTER (only one character changes)
Really makes sorting your library, especially now that there are only auto-sort options, really difficult.
To bring it back to the thread topic, I own all my games physically unless they're digital-only, but every one that has the 'Playstation Hits' banner on the PSN Store displays it on my icon as well, so it doesn't seem to be a digital/physical issue either.