And the very next evening I solved the problem.
Once you rescue the hermit, he will offer to train you. By beating him over and over (he isn't fighting with his real power, so you won't take damage and beat him and his fireballs with a single hit), you can gain the levels needed to beat the stage.
There are also two apprentices of the hermit hidden in the stage. Each will give you one of the hermits favourite foods and giving those to the hermit will make him stronger, thus allowing you to level up faster.
However, if and only if (this is what I failed to fully explore) you give him both of these food items, he will stop training with you at level 40. If, however you give him only one of the foods or neither, you can keep leveling beyond this, up to around level 60 where you'll start to run out of money to buy more time.
What I found was that giving him neither foods slowed the leveling up process so much, you didn't have time to get to level 60 before running out of money. But by giving him one of the foods, training untill I was level 60 and then (finding and) giving him the second food item, he would stop training me, challenge me and I was able to beat him.
And for completeness sake, my gear was Crimson Robe, Horned Helm, Spike Mace, Flash Shield and Bigfoot.
The Red Diamond title is obtained by obtaining Yohei (the first town's knight) as a companion by retrieving the red diamond in the southmost cave. This is the obvious course of action, given that obtaining $1,000 for Yohei and $200 for the boat and $many to the goddess to get enough time to complete the quest is no easy feat, while leveling up enough to take the middle boss on your own probably takes more time than it saves.
The Ear Killer title, as well as the Complete status for this map, is obtained by taking a little detour to the island just south of the ship dock.
Best Answer
To get the other piece of equipment, talk to Fred, who is the man running the store where you bought the hat. Usually you don't get anything interesting by pressing talk on a shopkeeper, but in this case he'll reward you with the War Hammer.
Obviously you're going to have to have already cleared the western town of the bandits, and told Fred it was safe to return before he will be in his shop.