I heard about these "Caganers" recently. The figurines aren't explicit and are actually sort of cutesy. It's a very old tradition, at least 3000 years. A very religious friend of mine defends it as a way of reminding people that Christ became fully human--i.e., "even Jesus poops" (though I guess if that was the point they could have actually depicted Jesus pooping).
An interesting bit of trivia from the
Wikipedia article: "In 2005, the Barcelona city council provoked a public outcry by commissioning a nativity scene which did not include a Caganer. Many saw this as an attack on Catalan traditions. The local government countered these criticisms by claiming that the Caganer was not included because a recent by-law had made public defecation and urination illegal, meaning that the Caganer was now setting a bad example."
The most interesting thing about that quote is that it implies public befouling wasn't made illegal in Barcelona until 2005! Talk about cultural differences!
I see no problem with the tradition.