Many organisms have a global mechanism for dosage compensation (DC) operating along the entire male X chromosome, which equalizes gene expression on the male X with that on the two Xs in females and/or on autosomes. At the initial stage of sex chromosome evolution, however, gene-by-gene (or localized) DC may also be necessary because the degeneration of Y-linked genes occurs independently at different times. We therefore tested whether the up-regulation of X-linked genes depends on the status of their Y-linked homologs, using the young sex chromosomes, neo-X and neo-Y, in Drosophila miranda. In support of the presence of gene-by-gene DC, the extent of up-regulation in males was indeed higher for neo-X-linked genes with pseudogenized neo-Y-linked homologs than for neo-X-linked genes with functional neo-Y-linked homologs. Further molecular evolutionary analysis also supports the idea that many individual neo-X-linked genes first acquired the potential for up-regulation, which then enabled the pseudogenization of neo-Y-linked homologs, without serious deleterious effects on male fitness.