* Market cheers opposition win in Japanese vote
* U.S. Midwest business on cusp of growth in August
* Chinese stocks drop 6.7 percent, stoking risk aversion
* Canadian dollar falls as oil drops below $70 a barrel (Adds comments, details and updates prices)
By Wanfeng Zhou
NEW YORK, Aug 31 (Reuters) - The yen rose broadly on Monday, hitting a 7-week high against the dollar, buoyed by a decisive opposition victory in Japanese elections and as declines in China's equities stoked risk aversion.
The yen received a boost after a landslide win Sunday by the Democratic Party of Japan, or DPJ, sparked hopes that new policies will support consumer spending in an economy trapped in deflation and haunted by a weak growth outlook.
A 6.7 percent slump in the Shanghai Composite Index also sent nervous investors flocking to the yen for safety and weighed on higher-yielding currencies like the Australian dollar earlier in the session.
The Canadian dollar tumbled after oil fell below $70 a barrel.
"We had a pretty important change in the Japanese political landscape over the weekend," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. "That usually is greeted by an element of optimism and that's why it's been generally supportive for the Japanese yen so far.
"This morning, sentiment was dominated by another strong and sharp sell-off in Chinese stocks," he added. "The Japanese yen was already ... on the stronger side. Then it got a further boost on the back of risk aversion."
In midday trading in New York, the dollar was down 0.6 percent at 92.79 yen after earlier hitting a low of 92.53 yen, according to Reuters data, its weakest level since mid-July. The dollar lost 1.9 percent against the yen in August, the worst monthly performance since May.
The euro lost 0.4 percent to 133.13 yen, while it rose 0.2 percent against the dollar to $1.4339.
The dollar gave up gains versus the euro to hit session lows after data showed business activity in the U.S. Midwest picked up at a faster pace than expected. The Chicago purchasing managers index rose to 50.0 in August from 43.4 in July.
"The Chicago PMI report is further indication that the U.S. economy is starting to improve," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "Overall, the data eased risk aversion a little bit, with positive data negative for the dollar and yen."
UNCERTAINTY AHEAD
Trading was quiet, however, with U.K. markets closed for a public holiday. The focus is on key events later in the week, including a European Central Bank policy meeting on Thursday and U.S. non-farm payrolls figures due on Friday.
Analysts said investors may be cautious about buying the yen too aggressively, given the uncertainty that will accompany the advent of a new government in Japan as well as concerns over the country's high levels of government debt.
A Reuters survey showed the DPJ's stance on fiscal discipline remains a source of concern, along with its stance on diplomacy, including U.S.-Japan relations. The DPJ plans to raise 16.8 trillion yen ($181.4 billion) over four years to fund its economic measures.
"Whether (DPJ leader Yukio Hatoyama) can succeed in transforming the Japanese society and economy remains to be seen," said Boris Schlossberg, director of currency research at GFT Forex in New York.
"Nevertheless, the near-term impact of the DPJ win could translate into further gains for the yen."
In other trading, sterling rebounded to last trade 0.3 percent higher against the dollar at $1.6311. But for the month of August, sterling was down 2.6 percent -- the biggest monthly drop this year. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Jan Paschal)