They obviously didn't have an issue with it because they even had a TV commercial where a stripper-esque model was simulating a sex act on Conker, and that was paid for by Nintendo.
Nintendo was going in a different direction in those days actually, both Perfect Dark and CBFD were allowed to be M-rated. They were greenlighting games like Riqa (Tomb Raider clone that never came out) and Eternal Darkness too.
Retro Studios was supposed to be a big studio that provided 4-5 teams that gave them edgier content too (Raven Blade, an NFL football game, a racing sim, etc.).
This was largely stemmed from the massive success of GoldenEye on the N64 I think.
Sadly, I think Nintendo made a massive mistake in listening to Rare and not renewing the James Bond license. Sure it's nice to listen to your developer, but you don't throw away a formula that has just sold you 6+ million copies or whatever it was.
Also basically what happened was Retro fell apart and Nintendo in Japan was forced to restructure it. Minoru Arakawa and Howard Lincoln (the heads of NOA at that time) were retiring.
After all that happened NOA was never the same again. Under Iwata, Nintendo sold Rare, cut ties to Factor 5/Silicon Knights/Left Field/etc. and retuned Retro into a smaller studio that worked on basically Metroid/Donkey Kong only.
I like Iwata but he definitely pushed Nintendo away from the more Western-centric/hardcore direction they were heading in. Nintendo definitely has not really pursued projects like Conker's Bad Fur Day since and sadly since it was released so late on the N64 it was doomed to bomb. Would've done better as a GameCube launch title I think.
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