FWIW, Ledyard Sensei himself has expressed some ambivalence about this kind of practice, for exactly the reasons discussed here.
In my experience, it's great training for helping people understand the kind of intensity that's involved in a "real fight." But it's somewhat counterproductive if you're trying to teach things like relaxation and sensitivity. Like most teaching tools, there's a time and a place for it, but also limitations.
I would like to be clear that what we do is not "sparring". I took these exercises directly from the Maniwa Nen Ryu kenjutsu folks. It is used to develop speed, strong focus and intention. It also lets you feel what it's like when your partner REALLY tries to hit you, something you really don't get with bokken, even when the training is fairly energetic.
Basically, one partner delivers continuous shomen attacks with full intent. The other partner responds with one of three techniques. So, whereas the attacker does not know which response will come, it is not a freestyle. What I like about the exercise is that contains just enough "competition" that you find out what really works and what does not. The attacker develops the ability to really attack with speed and power. If the defender's technique is not spot on, the attacker strikes him. If the defender's technique is spot on, then the attacker gets hit. It's that simple. No one has to worry about whether his stuff is working because the partner is colluding.
On some level, much Aikido sword work actually encourages people to place their attention in the wrong place. Too much is on the attacking weapon itself rather than training the student to take the center and owning the space. This work is a safe way to both train everyone to go to the center without hesitation but it also serves to desensitize the practitioners against the fear of contact.
On the negative side, I would not do too much of this practice. The desensitization against forceful contact is essential to ones ability to do "irimi". But it is also unrealistic when one is talking about real bladed weapons. Too much use of protective gear takes away the mental tension that appropriately comes with bokken and especially blade work. The knowledge that one slip can mean injury or death is crucial to higher level skills. So, we only do this type of training periodically, maybe a couple times a year and only with the seniors. That said, it is usually quite a shock the first time someone does this work when they find that their stuff doesn't work without some major changes in where and how they direct their intention.
I find that using weapons for this kind of development carries over into empty hand and folks get sharper and faster on their attacks. We still do classes periodically on how to actually do the various strikes with speed and power but the sword work is a great way to safely develop strong intent.
The equipment we use is simply. Ice hockey or street hockey gloves are best in my opinion as they have an armored thumb which is nice. The helmets we use are full contact stick fighting helmets designed by Grandmaster Canete for sparring in Doce Pares Escrima. You can use other equipment. Kendo protective gear isn't that great. It is designed for use with shinai that have a lot less mass than the fukuro shinai
we use. The helmets we use are far more padded and, although it isn't totally pleasant to get clobbered if you miss your technique, it isn't bad either. Kendo gear would keep you from being injured but that's about it. Since we are trying to teach people to really commit and not to be afraid of a certain amount of contact, it's better if it isn't too unpleasant or the desired result is thwarted.
Full Contact Helmets